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LES ECHOS(France),FINANCIAL TIMES, TELEGRAPH(UK), WALL STREET JOURNAL (USA), REUTERS

Worldcrunch

Europe’s two largest defense companies have until October 10 to decide whether to pursue a merger that would create the world’s largest defense conglomerate, with annual revenue of 78 billion euros and more than 225,000 employees worldwide.

According to the French business daily Les Echos, the deal would involve a 60/40 capital split between EADS and BAE. The merger concerns not only France, the United Kingdom and Germany, but also the United States, Australia, India, Finland, and Saudi Arabia, among others.

Because of national security implications, the potential merger has been subject to intense scrutiny since it was leaked to the press on Sept. 12.

EADS, the European Aeronautic Defense and Space Company, is a European aerospace and defense company based in Toulouse in the south of France, but with subsidiaries and markets worldwide. It produces civilian and military airplanes, helicopters, missiles, satellites, and command and control systems.

EADS itself was created by a merger between two huge defense conglomerates, the German DaimlerChrysler Aerospace and the Spanish Construcciones Aeronáuticas, in 2000. Its major companies include Airbus, Eurocopter, Astrium, and Cassidian.

BAE Systems is a London-based conglomerate formed in 1999 from Marconi Electronic Systems and British Aerospace. BAE builds aircraft carriers, fighter planes, drones, nuclear submarines, tanks, guns, and electronic defense systems. It is one of the world’s top three arms companies and is a major contractor to the U.S., British, Australian, and Indian governments, among others.

The merger would allow the two companies, which specialize in different areas, to create synergies that could help the bottom line. They would stay largely separate for operating purposes and would be listed separately on the stock exchange.

For BAE, which has not been as successful financially in the past few years as EADS, a merger would allow it to improve its credit rating and overtake U.S. aircraft giant Boeing. For EADS, one of the main motives behind the merger is to make headway in the gigantic U.S. defense market, BAE’s largest customer. BAE has 40,000 employees in the U.S.

However, national defense concerns are one of the main obstacles to the merger. EADS and BAE have promised the German, French and British governments special shares in the newly formed entity, which would allow them to protect their national interests. For example, there would be a guarantee against relocation of factories to other countries, and protection for strategically important functions like France’s nuclear missiles, British nuclear submarines, and BAE’s cyber security contracts with the U.S.

But the French government might lose its current veto power over EADS strategic decisions, or the German government could be given an equal veto. This poses a political problem for French president François Hollande, says Reuters.

And EADS, which is 15% owned by the French government, is “so distrusted in the US that its numerous efforts to work with the U.S. military have failed” except for selling helicopters, according to the Financial Times. The United States is especially concerned about intellectual property theft, and BAE’s contracts with the U.S. Defense Department could suffer.

Another potential problem is labor relations. Mergers typically involve layoffs, and British workers, who tend to be Euro-skeptics, are concerned about being targeted for layoffs ahead of better-protected French and German workers. British politicians have promised to examine the merger thoroughly, writes the Telegraph.

The markets also reacted unenthusiastically to news of the possible merger. According to the Wall Street Journal, EADS and BAE shares have both dropped in value since the announcement.

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