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Home Defence & Military News Air Force News

BAE-EADS Combination Is Possible, But Not Inevitable

by Lexington institute
September 17, 2012
in Air Force News
2 min read
0
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The reason companies considering strategic moves are so secretive is that once news of their intentions leaks out, it can change the business environment shaping their plans. So it is with yesterday’s disclosure by Bloomberg News that British military powerhouse BAE Systems and Airbus parent EADS are considering a merger. Talks about pursuing a combination have reportedly been under way since June, but some of the key details are still being discussed. Having investors and politicians on both sides of the ocean weigh in before deliberations are complete will undoubtedly complicate matters.

Since I am an advisor to several companies with a stake in the outcome, there’s a lot I can’t say on the subject. But just on the basis of what has been publicly reported, a few things should be obvious.

For starters, this is not a done deal. The parties still need to iron out some important issues, including how to protect sensitive information in the various countries where the combined entity will do business.

If and when those details are resolved in favor of a merger, the proposed combination will need to pass muster with regulatory authorities in Europe and America. That may prove to be a lengthy process, and there’s no way the outcome can be predicted today.

Although the proposed deal would create the biggest aerospace and defense company in the world, it appears to present no antitrust issues for U.S. regulators because EADS has such a small footprint in the U.S. BAE Systems is the seventh-ranked Pentagon supplier in terms of prime contracts so far this fiscal year, and adding the $300 million or so in domestic defense revenues that EADS has generated would not alter the rankings. The transaction would not lead to greater horizontal or vertical concentration in the U.S. market.

With regard to security concerns, the parties will presumably include structural features in the proposed combination that enable the BAE Systems component of the business to remain a trusted supplier of the federal government.

Although executives at Boeing probably will not be pleased to see their biggest rival in the commercial transport business get even bigger, the proposed merger is in a way a compliment to Boeing because it embraces the same business logic the Chicago-based company has been pursuing for the last dozen years. That logic argues that military aerospace demand often strengthens as commercial aerospace demand is weakening, and vice versa, so the way for a big aero company to generate stable results is to be well-positioned in both segments of the market.

A BAE-EADS merger would produce precisely that result by combining one of the world’s leading military suppliers with one of the biggest producers of commercial transports. BAE Systems needs the commercial business to smooth out its military results, and EADS needs the military business to mitigate cyclicality in the commercial transport market.

Although the resulting combination would be bigger than Boeing — about $90 billion in annual revenues versus $80 billion — it would also be a lot more complicated. Boeing might be able to react more quickly to emerging opportunities given its more streamlined structure. So the fact it will be facing a bigger overseas competitor doesn’t necessarily mean it will operate at a disadvantage.

But whether that new competitor coalesces at all remains to be seen, because this transaction is still in the early stages and many issues remain to be resolved.

Tags: airbusBAE systemsEADSMerger
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