BAE And EADS Reveal Merger Deal Has Collapsed

It has been confirmed that the proposed £28bn merger between BAE Systems (LSE: BA.L - news) and EADS (Euronext: EAD.NX - news) will not take place because of the failure of competing governments to agree equity terms.

"BAE Systems and EADS announce that they have decided to terminate their discussions," the two companies said in a joint statement.

"Discussions with the relevant governments had not reached a point where both companies could fully disclose the benefits and detailed business case for this merger.

"BAE Systems and EADS are, however, confident that these would have provided a strong case to take to their shareholders.

"BAE Systems and EADS believe that the merger was based on sound industrial logic. It represented a unique opportunity to create a combination from two strong and successful companies greater than the sum of the parts."

The breakdown in the merger follows several days of speculation over significant disagreements between the British, German and French governments, which would all have had a stake in the merged company.

The boards had been discussing whether to request about two weeks extra to complete their talks, but the failure of government-level negotiations ultimately killed off the prospect of a merger.

Guy Anderson, senior analyst with IHS Janes, told Sky News the failure to reach a deal will put significant pressure on BAE Systems.

"There will almost certainly be greater pressure on BAE Systems than EADS to reveal a plan B strategy as soon as possible," he said.

"BAE Systems is better placed than many of its contemporaries in terms of margins and global reach, but the EADS merger talks mean the company has put itself firmly out on the field in terms of merger discussions and strategic direction.

"Investors are unlikely to be satisfied with business as usual. The continuation of BAE Systems' strategy of divesting non-core assets appears likely, although circumstances may call for something greater than the low-key approach taken so far."

Politics has been at the heart of the difficult merger negotiations. Britain wanted to ensure the French and German governments did not have a combined stake in the new company of more than 18%.

Germany and France had sought a combined stake of 27%, but German Chancellor Angela Merkel was reportedly against the deal altogether.

The British Government's preferred outcome in any merged company would have seen the three Governments receive a 'special share' in the company.

Each government would have been able to block another from owning more than 15% of the merged entity.

UK-owned BAE Systems is one of the world's largest defence manufacturers.

It is the favoured supplier to the British Ministry of Defence and has orders and operations in countries around the world, including a significant presence in the United States. It has 95,000 employees worldwide, 35,000 of whom are in the UK.

EADS is a pan-European aerospace manufacturer. The governments of France, Germany and Spain all have a stake in the company, which incorporates civilian aircraft maker Airbus (Paris: NL0000235190 - news) .

The rationale behind the proposed merger was this: the defence industry in Europe (Chicago Options: ^REURUSD - news) and the US is in decline. IHS Jane's forecasts a military procurement spending decline of $20bn (£12bn) over the next four years. But conversely, demand and orders for civilian aircraft is, at the moment, on the up.

BAE wanted to protect its exposure to a problematic defence market while at the same time opening up new opportunities in the civilian aircraft market, and EADS wanted greater access to the defence world - and the US market - through BAE.

In some towns, like Barrow-in-Furness, much of the population works for or relies on BAE Systems, either directly or indirectly. The company has already axed thousands of jobs over the past 18 months and there are concerns a merged company could result in more job losses.

Job cuts are usually associated with mergers because operations often overlap.

But, in this case, analysts believe further job cuts are more likely without a merger than they were with one because BAE now remains exposed to the weakening global defence market.

BAE's largest shareholder is Invesco Perpetual. On Monday, it expressed "significant reservations" over the proposed merger.

The investment firm, which has a 13% stake in BAE, outlined its concerns about the structure of the new company and the impact on its shareholder value.

"Invesco (NYSE: IVZ - news) are worried that the deal will affect BAE's access to the US market," Dr Robin Niblett, from Chatham House, said.

"If there is a large French and German government shareholding, then Boeing (NYSE: BA - news) and other rivals of BAE will be able to undercut their position."