EADS and BAE Systems in Advanced Merger Talks

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EADS, BAE Systems in Advanced Merger Talks
By Reuters Staff
September 12, 2012
http://www.aviationweek.com/Article.aspx?id=/article-xml/awx_09_12_2012_p0-494691.xml
Europe’s EADS, the parent of Airbus, and Britain’s BAE Systems are in advanced discussions about a merger, two sources close to the deal said Sept. 12.

BAE shareholders would own 40 percent of the combined group and EADS shareholders the remaining 60 pct, BAE said in a statement.

“The potential combination would create a world class international aerospace, defence and security group with substantial centers of manufacturing and technology excellence in France, Germany, Spain, the U.K. and the U.S.A.,” BAE Systems said.

A merger of the two European aerospace companies would not be expected to raise antitrust concerns in the United States given the modest amount of U.S. military revenues generated by EADS, according to the sources, who were not authorized to speak publicly.

They said a merger has been under discussion for several months, spurred in large part by declining defense spending in Europe and the United States.

The two companies have a long history of collaboration and are partners in a number of projects, including the Eurofighter and a deal would also bring BAE back into having a direct interest in Airbus and its British plants, having sold its 20 percent stake in 2006.

Combined, BAE and EADS would have combined sales of about 72 billion euros, based on 2011 numbers, and would have 220,000 employees worldwide.

The companies said that due to the sensitive nature of the companies’ defence business in countries stretching from the United States to Saudi Arabia and Australia, they were talking to governments around the wrold about the deal.

They said certain defence activities would be ringfenced with governance arrangements appropriate to their strategic and national security importance, particularly in the United States, given the importance of that market to the enlarged group.
 

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"The Many Complexities of a EADS-BAE Merger"
By STEVEN M. DAVIDOFF
http://dealbook.nytimes.com/2012/09/12/the-many-complexities-of-any-eads-bae-merger/

BAE Systems and EADS Say They Are in Merger Talks

The bombshell announcement of a possible tie-up between EADS and BAE Systems is only that – a possibility. Before a deal can be reached, the intense national issues surrounding this merger still need to be navigated.

And a review of the parties’ announcement shows that multiple governments will be involved and extremely complex agreements will need to be negotiated. In other words, a combination may take a while — if it ever comes.

In their announcement, EADS and BAE Systems stated that if they agreed to a transaction the two companies would not actually combine; instead, they would enter into a dual-listed company structure. The two stated that “both companies would operate as one group by means of equalization and other agreements but would be separately listed on their existing exchanges.”

As I have written before, such a deal “is a virtual merger structure utilized in cross-border transactions. The companies do not actually effect an acquisition of one another, but instead enter into an unbelievably complex set of agreements in which they agree to equalize their shares, run their operations collectively and share equally in profits, losses, dividends and any liquidation.” These arrangements are entered into by agreement and not by combining the two companies.

A dual-listed company structure has traditionally been used instead of a full merger when there are tax issues related to dividends. The two companies, based in different countries, will want their local shareholders to continue to have their dividends taxed by the home country to take advantage of local quirks and avoid foreign withholding.

The best examples of this are BHP Billiton and Rio Tinto which are both dual-listed companies involving a British public limited company and an Australian public limited company. The reason is to allow Australian stockholders to take advantage of a dividend tax credit that British shareholders cannot. British shareholders thus invest in the British company (e.g. BHP) and Australian ones in the Australian entity (e.g., Billiton).

There are other reasons to use a dual-listed company structure. Flow-back – where shareholders of a target subsequently sell shares issued by an acquiring company from another country leading the shares to return to that country — is also a common problem in big cross-border deals. The shareholders of the company that is disappearing will sell their shares either because they are mutual funds that cannot hold foreign shares or because they prefer local investments.

A dual-listed company can stop this flow by allowing shareholders to retain a local investment option. In fact, the crucial point of a dual-listed company is that the shares are not exchangeable. A holder in BHP-Billiton’s Australian company – again, the Billiton part — cannot exchange their shares for the BHP part. They really are separate companies.

Finally, a dual-listed company is a way to salve issues of national pride or national security allowing the combined entity to claim two homes.

EADS and BAE Systems are likely to use a dual-listed company structure for all three reasons. BAE is an English company and EADS is a Dutch one. Prior examples of Dutch/English dual-listed companies include Royal Dutch Shell, Reed Elsevier and Unilever, all of which used this arrangement to preserve national heritage and dividend tax treatment.

But in all probability, the nationality issue was the primary driver for the BAE-EADS talks. BAE is an aerospace institution that was once owned by the British government. EADS was formed in 2000 by a merger of industrial companies from Spain, France and Germany. The Netherlands was picked as the locus of incorporation for EADS because it is neutral territory. Today, 49.35 percent of EADS’s shares are owned by the public, with the French government and the German company Daimler controlling a 22.35 percent interest each and Spain a 5.45 percent interest.

A dual-listed company structure thus allows BAE to preserve its British heritage while EADS can still claim to be a Continental European company that will still be owned by these French, German and Spanish entities.

But by contractual agreement, EADS shareholders and BAES shareholders will now vote as a group for the boards of both companies, which will be identical. Even then, though, the EADS shareholders will still wield substantial influence. According to the announcement, the combination will give EADS shareholders 60 percent and BAE shareholders 40 percent control.

As a further sop to national interests, the two companies announced that “the parties envisage issuing special shares in BAE Systems and EADS to each of the French, German and U.K. governments to replace the existing U.K. government share in BAE Systems and the stakeholder concert party arrangements in EADS.” These special shares, also known as golden shares, will allow the four countries to veto any subsequent takeover of the combined entity and may provide other rights.

In addition, both companies have extensive worldwide defense operations, and BAE in particular has built up its United States presence. The companies will have to make arrangements with the United States government and obtain national security clearance for any tie-up. BAE and EADS anticipate that the United States government will require that BAE’s defense interests be kept separate from EADS, announcing that “certain of their defense activities would be ringfenced” specifically mentioning the United States as one place where this would have to happen.

Dual-listed companies are notoriously complex beasts. They require intricate contractual documentation and negotiation that can take months if not years to complete. In this case, the structure of this combination needs to be coordinated with national governments not only in Europe but to account for United States security demands.

Under the British takeover rules, the parties are now required to announce a transaction by Oct. 10 or obtain an extension from Britain’s Takeover Panel. Given what is at stake, expect that an extension will be needed.
 

robunos

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Unfortunately I get the feeling that it's a way for BAE Systems to divest themselves of their UK aircraft building operations.

cheers,
Robin.
 

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How does this sit with the aims of the Defense Industrial Strategy? All that maintaining 'sovereign capablity'.... Hmmm....
 

GTX

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Sorry, but that is a ridiculous concern. You seem to be acting like BAE Systems (NOT BAe) is some small organisation being taken over by a huge corporation. BAE Systems is currently reported to employ something like 100,000 employees and in some countries like Australia is the largest single Defence contractor. It also operates in many diverse fields as a significant 'player' (potentially even more so than EADS). For comparison, EADS reportedly has something around 130,000 employees. As is reported, this is more a merger then a takeover. Any talk/concern over supposed loss of British identity of this "UK company being swallowed by the big bad European corporation" needs to be given a reality check! Despite what people may like to think, BAE Systems stopped being just a British company years ago. Arguably more than any such company, it is more a "Global company" now with significant operations in countries such as the USA, Australia and South Africa.
 

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What prevents the combined EADS/BAE Systems business entity from relocating manufacturing to lowest cost regions and layoffs/redundancies in countries with higher labor costs? The Defense Industrial Strategy is also about retaining British jobs and British-based manufacturing operations. I don't believe it is a ridiculous concern.

Also consider that mergers and acquisitions also result in the elimination of products and product lines and reduce choices for consumers, in this case airlines and governments. Remember what happened to McDonnell Douglas' civilian airliner operations after the merger with Boeing? Mergers and acquisitions are all about reducing costs.
 

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DonaldM said:
What prevents the combined EADS/BAE Systems business entity from relocating manufacturing to lowest cost regions and layoffs/redundancies in countries with higher labor costs?


What is to stop them doing this now...really?


DonaldM said:
The Defense Industrial Strategy is also about retaining British jobs and British-based manufacturing operations. I don't believe it is a ridiculous concern.


You do realise that BAE Systems is in more locations than the UK don't you? As I have already pointed out, BAE Systems is already a global company an not just a UK company...or are those BAE Systems staff employed in the USA, Australia, South Africa...etc also somehow measured as British???


Anyway, relying on Protectionist policies to guarantee jobs is a policy that results in higher priced solutions being offered.
 

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GTX said:
Anyway, relying on Protectionist policies to guarantee jobs is a policy that results in higher priced solutions being offered.

Not necessarily. The contractor might choose to keep prices the same and enjoy higher profit margins with lower labor costs and perhaps less stringent and less costly safety and environmental regulations. This always seems to be the knee-jerk argument in favor of mergers and acquisitions that larger entities create economies of scale and lower prices.

Further, shouldn't governments buy vehicles and equipment manufactured in their own country and have tax revenues spent in benefiting local economies?

Do you really believe that a combined EADS/BEA Systems is going to continue to offer unique weapon systems for the armed forces of the United Kingdom? I would argue that with such a merger, there will be greater pressure to standardize weapons, vehicles, and equipment with the other countries in which EADS operates.
 

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DonaldM said:
Further, shouldn't governments buy vehicles and equipment manufactured in their own country and have tax revenues spent in benefiting local economies?

Not necessarily...after all most of the world doesn't work that way. Moreover, if that were the case, I think you might find that BAE Systems would be a much, much smaller entity especially if it were to only be relying on UK sales and not exports. Why do I say this? Well, by extension, your argument would imply that all Governments should only buy vehicles and equipment manufactured in their own country. If this were the case, companies like BAE Systems that export as well might find themselves severely curtailed ...unless of course you want double standards whereby the UK has to buy British but is is fine for all other countries to also buy British... ::)

DonaldM said:
Do you really believe that a combined EADS/BEA Systems is going to continue to offer unique weapon systems for the armed forces of the United Kingdom? I would argue that with such a merger, there will be greater pressure to standardize weapons, vehicles, and equipment with the other countries in which EADS operates.

And so what? I would be curious to see what uniquely UK requirements you may be referring to?
 

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Actually a brief look at BAE Systems' own website provides a useful picture of just how much the company is no longer a purely British/Uk company:

As of 31 Dec 2011:

Australia: circa 5,600 employees
India: circa 100 employees
Saudi Arabia: circa 5,800 employees
United Kingdom: circa 34, 800 employees
United States: circa 37,300 employees

Now obviously this isn't the complete picture and it is also some months out of date. Regardless though, the message here is that although an important market and one that has heritage for the company, the UK is but one of BAE Systems' areas of operation, and if you were to use employment numbers as a crude guide, not even the biggest...
 

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Consider the merger of Boeing and McDonnell Douglas in 1997 and customer choice now in the civilian airliner market. Boeing discontinued the McDonnell Douglas MD-11 and MD-9x product lines. McDonnell Douglas was also looking for investment partners for the MD-12 and MD-XX airliner projects which will never be offered in the civilian airliner market.

The Long Beach manufacturing operations of Boeing are now only used for building the C-17 transport aircraft for the Air Force and will likely close in 2014 resulting in the loss of 6,000 jobs. How did these 6,000 jobs benefit the local economy of Los Angeles County?

You can say "so what" that we don't have the MD-11 and MD-95 (Boeing 717) and that's just capitalism and you can say "so what" for the loss of the 6,000 jobs.

Consider that any future fighter competition will not include a proposal from McDonnell Douglas.

Consider though that there are other stakeholders involved with a merger between EADS and BAE Systems. You can list the current workforces by country, but there will certainly be layoffs and redundancies as the operations are combined and that these numbers will change.

We know that Germany and France don't operate VSTOL fighters, perhaps the F-35 may be the last VSTOL fighter purchased by the Royal Navy.
 

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Which is why I posted what I did in #3 above.

The next combat aircraft to be deployed by British forces, the F-35, is US built, with no BAE airframe input, that I'm aware of.
The type after that, the Tornado replacement, will probably be the F-35 as well, see above.
There are no export orders for the Typhoon, as yet, the production numbers are not that great, and are shared with Germany and Italy.
BAE's other major airframe product, the Hawk, is losing market share, as it's customers acquire the technologies to produce their own aircraft...
BAE also currently has no civilian programsoutside of the Airbus collaboration.

Thus, the Typhoon programme can be shunted over to the EADS side of the business, the Hawk taken off the market, and BAE is out of airframes, and free to concentrate on systems integration, which appears to be their current preferred business...

cheers,
Robin.
 

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DonaldM said:
Consider the merger of Boeing and McDonnell Douglas in 1997 and customer choice now in the civilian airliner market. Boeing discontinued the McDonnell Douglas MD-11 and MD-9x product lines. McDonnell Douglas was also looking for investment partners for the MD-12 and MD-XX airliner projects which will never be offered in the civilian airliner market.


Would those products have ever made it to market or remained in production even if Boeing hadn't stepped in? I would imagine that had they been such a great business proposition, then McD wouldn't have been taken over or whatever...or indeed, you may have seen Boeing keep them in production over one of their existing platforms since it made better business sense. Don't be fooled into thinking that mergers or takeovers simply involve a 'slash and burn' approach to those being supposedly taken over,

DonaldM said:
The Long Beach manufacturing operations of Boeing are now only used for building the C-17 transport aircraft for the Air Force and will likely close in 2014 resulting in the loss of 6,000 jobs.


That's business - no orders or not enough orders mean no work...regardless of how much people may wish for something to happen. ::) And if you think that Boeing hasn't tried to find ways of keeping the facility open (if it makes business sense) than you are sadly mistaken. Despite what some may like to portray, most businesses and their managers/leaders do not like laying people off. It is usually the absolute last resort after all else has been tried.

DonaldM said:
Consider though that there are other stakeholders involved with a merger between EADS and BAE Systems. You can list the current workforces by country, but there will certainly be layoffs and redundancies as the operations are combined and that these numbers will change.


My listing of numbers was to highlight what I was saying about BAE Systems no longer being just a British company.


Re layoffs etc, I could argue that there may be just as many redundancies or the like in the EADS side of the business should this all happen - I don't see anyone crying out about that though. If the UK based aspects are so much better or so deserving of staying in operation post merger, surely they should stand up on their own merits rather than be protected.


Moreover, how do you know a better product/solution might not result?

DonaldM said:
We know that Germany and France don't operate VSTOL fighters, perhaps the F-35 may be the last VSTOL fighter purchased by the Royal Navy.


What is the point here - to imply that only the involvement of BAE Systems would result in a future UK Defence VTOL platform?
 

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robunos said:
The next combat aircraft to be deployed by British forces, the F-35, is US built, with no BAE airframe input, that I'm aware of.

on the Airframe side, BAE Systems has the lead in manufacture of the aft fuselage, vertical and horizontal tails and wing tips...mind you, some of this is manufactured outside of the UK in places such as Australia.

robunos said:
There are no export orders for the Typhoon, as yet, the production numbers are not that great, and are shared with Germany and Italy.
BAE's other major airframe product, the Hawk, is losing market share, as it's customers acquire the technologies to produce their own aircraft...

Re Typhoon, what do Austria, Saudi Arabia constitute then, if not export orders? BTW, Spain is also involved in there.

Re the Hawk, it is remarkable that a product which is coming up on 40 odd years is still in production at all. It must end sometime though...regardless of mergers or no mergers. Moreover, if you were to decry the eventual ending of Hawk production, one might just as easily blame BAE Systems for not developing a successor...
 

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on the Airframe side, BAE Systems has the lead in manufacture of the aft fuselage, vertical and horizontal tails and wing tips

Thanks GTX, I was unaware of this...

some of this is manufactured outside of the UK in places such as Australia.

Do you happen to have a breakdown on what's made where? I'd be interested.

Re Typhoon, what do Austria, Saudi Arabia constitute then, if not export orders? BTW, Spain is also involved in there.

Opens mouth to insert foot... :-[

one might just as easily blame BAE Systems for not developing a successor...

I think that's part of the problem. When export deals are done, it seems to be 'We will buy xx Hawks from you, but we also want to know how to build our own, or no deal...' Thus, there's no incentive to develop a new aircraft, as in order to sell it, you have to show the customers how to make it, too...

cheers,
Robin.
 

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robunos said:
some of this is manufactured outside of the UK in places such as Australia.

Do you happen to have a breakdown on what's made where? I'd be interested.


I don't have an exact breakdown sorry. I do know for example though that BAE Systems Australia are making some vertical tail fin parts (machined titanium parts). Interestingly though, it is Marand Precision Engineering (also of Australia) who have been selected by BAE Systems UK to actually assemble the full vertical tail fins (as a second source to BAE Systems UK).
 

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http://www.independent.co.uk/news/business/news/bae-warns-of-giant-jobs-cull-if-merger-is-blocked-8142207.html

http://www.telegraph.co.uk/finance/comment/9545199/So-far-so-unconvincing-for-this-BAE-mega-deal.html

http://www.guardian.co.uk/business/2012/sep/16/bae-eads-merger-fears

cheers,
Robin.
 

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Well, after that just to buy or merge with Dassault group and Finmeccanica group and it will mean definitive end of competition in Europe.

In my opinion if decreasing sales are the reason, the merger is not a solution.
 

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Seen from the products portfolio perspective, there is only the Eurofighter and possible future combat aircraft that EADS and BAe have in common. And there they are already working together. I think it would have some, but not a big effect on technological capabilities of the different companies.
 

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"Analysis: Proposed Merger Saves BAE, Handicaps EADS"
(Source: Defense-Aerospace.com; published Sept. 19, 2012)
By Giovanni de Briganti

http://www.defense-aerospace.com/cgi-bin/client/modele.pl?shop=dae&modele=feature&prod=138553&cat=5
 

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DonaldM said:
I wonder if the merger of EADS and BAE Systems will allow Lockheed Martin to merge with Northrop Grumman?

I hope not. And if EADS and BAE do merge I hope the US government is smart enough (yeah, who am I kidding) to make BAE sell off it's US holdings as a condition. If NG snapped up BAE's US business that could be interesting. Or maybe United Technology.
 

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One funny thing that came to my mind are the coalitions in MALE and UCAV development. According to signed agreements, BAE Systems and Dassault are in coalition to develop the Telemos and later some production UCAV. As a response, Alenia signed a memorandum of understanding with EADS to develop Talarion and later also some UCAV. All the players are apparently in bad positions in that game :)
 

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Well, whatever your opinion on the deal... It would appear now to be off (source - BBC News).
 

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Notwithstanding a great deal of constructive and professional engagement with the respective governments over recent weeks, it has become clear that the interests of the parties' government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger. BAE Systems and EADS have therefore decided it is in the best interests of their companies and shareholders to terminate the discussions and to continue to focus on delivering their respective strategies.

Ian King, Chief Executive of BAE Systems, today said:

"We are obviously disappointed that we were unable to reach an acceptable agreement with our various government stakeholders. We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world class and complementary businesses to create a world leading aerospace, defence and security group.

Source:
http://otp.investis.com/generic/regulatory-story.aspx?cid=288&newsid=277213

Looks like one or more government customers objected to the merger. I wonder who...
 

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DonaldM said:
Looks like one or more government customers objected to the merger. I wonder who...

I'm afraid, ,that a large part of this decision came from the German government, which wasn't happy
about this merger from the beginning. Main reason probably were fears about losing jobs in Germany,
a theme, that could have consequences in several elections and of course of losing influence.
I really hope, that with hindsight we won't have to say " ... if only they would have agreed !" ::)
 

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It will be interesting to see what happens next since presumably the desire and quite probably the need to undergo some sort of merger continues to exist in both parties.
 

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GTX said:
It will be interesting to see what happens next since presumably the desire and quite probably the need to undergo some sort of merger continues to exist in both parties.

You mean workforce reductions?
 

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Maybe...but just as easily it could be that one merger grows out of the ashes of another failed one...I have seen this happen before.
 

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What are possible scenarios?

EADS dumps the defence sector, which will be merged with BAE?

They try to merge again.

Nothing happens and EADS continues buying smaller companies.
 

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Some interesting analysis: http://uk.reuters.com/article/2012/10/18/uk-eads-shareholders-idUKBRE89H1BU20121018
 

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Source:
http://www.guardian.co.uk/business/2012/sep/23/bae-wary-us-reaction-swallowed-up
 

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GTX

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That cartoon, perpetuates the flawed, sentimentalist thinking that has been evident in some since the start of this whole issue. Once again it provides the impression of little ol' British company being taken over by this huge corporate EADS. This is deliberately misleading. As I said back in early Sept: "BAE Systems is currently reported to employ something like 100,000 employees and in some countries like Australia is the largest single Defence contractor. It also operates in many diverse fields as a significant 'player' (potentially even more so than EADS). For comparison, EADS reportedly has something around 130,000 employees. As is reported, this is more a merger then a takeover. Any talk/concern over supposed loss of British identity of this "UK company being swallowed by the big bad European corporation" needs to be given a reality check! Despite what people may like to think, BAE Systems stopped being just a British company years ago. Arguably more than any such company, it is more a "Global company" now with significant operations in countries such as the USA, Australia and South Africa."
 

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