Wedding of the elephants: merger between BAE and EADS in the making

Europe's two biggest arms companies, British BAE Systems and German/French/Spanish EADS announced that they are negotiating a merger, or an 'elephants wedding' according to the press. This wedding would create the single largest defence company in the world, bigger than the present number one Lockheed Martin. According to the American weekly Defense News, Lockheed Martin had a 2011 turnover of 43,978 million US$, while BAE Systems had 29,130 million US$ and EADS' military business was worth 16,092 million US$. The companies plan for the French, German and British governments to have special 'golden' shares in the new company, allowing them to block hostile takeovers and protect assets related to national security, such as nuclear weapons. The German government is sceptical about the plans.

A merger of the two arms giants would leave Europe with one big military aerospace company, only excluding Italy's Finmeccanica, which is at present the global number eight. BAE and EADS are already involved in several common projects, such as the Eurofighter Typhoon and the shared ownership of missile builder MBDA [with Finmeccanica], which is also producing nuclear missiles for the French armed forces.

Photo: MBDA naval missile

In other areas however they have been competitors, demonstrated by their rivalling work on combat drones (UCAVs). In 2010 the UK and France agreed on a military cooperation program, including the development of Telemos unmanned aircraft by BAE and French Dassault Aviation. This is immensely frustrating EADS, which has been investing money into new European drone types and was hoping for governments to back up the development of its Talarion combat drones. Its position on the drones market improved when in January 2012 EADS military division Cassidian signed a joint venture contract with Bremen-based Rheinmetall Airborne Systems, providing access to both the German market and the technical input from Rheinmetall's partner Israel Aerospace Industries (IAI).

France is trying to bring all European efforts together and recently reached a political agreement with Germany on the development of a common MALE unmanned system “while respecting commitments for Anglo-French cooperation on a future MALE drone” the French Defense Ministry said in a statement. France is strongly pushing European drone development. It urgently has to replace its Harfang drones and is not very keen on buying US Reapers because this would mean giving up French military autonomy.

A giant merger between BAE Systems and EADS might give new impetus to common European procurement. The European military industry, with its high R&D costs, is still at a disadvantage vis-a-vis the American industry, which profits from [often] having a big first customer, the Pentagon. Especially the European military aerospace industry is lobbying hard for more European standardisation, ideally with one product to fit all armed forces. At the same time, a merger with BAE will give EADS stronger American access, with BAE having a large share of its contracts coming from the Pentagon. This is a potential threat for US company Boeing (the nr.2 global arms producer) and arch rival of EADS' Airbus. It might lead to closer ties between Boeing and Northrop Grumman (nr.6).

EADS defence division Cassidian announces on its website that it will continue to accelerate its drive to globalise its business outside Europe, expecting to generate more than 50% of its total business outside the traditional home countries. BAE has seen immense job losses over the past years, and both companies suffered from the loss of a big hoped-for Eurofighter order from India. Remarkably, after the announcement of merger talks shares of EADS fell 5.6% while BAE shares rose 11%.

WdV 14/09/2012