The German chancellor wields singular influence on the A&D industry's future
On a sunny weekend in the south of Germany last August, the new chief of , Tom Enders, had a rare opportunity to relax and take some time for his hobbies, such as paragliding. And although many consider it a dangerous pastime, Enders had never been seriously injured. So why should this time be different?
As it turned out, Enders should not have jumped that day. The CEO hurt himself seriously enough during a landing that he had to cancel what might have been the most important business trip of his career and an historic meeting for the giant aerospace company he leads.
Enders had planned to accompany German Chancellor Angela Merkel on a state visit to China as part of the official delegation. Trips to China involve long flights and the chancellor's VIPhas enough room to allow private meetings. EADS's master plan for communications foresaw Enders meeting with Merkel on the flight to Beijing and having plenty of face time with her in which to make a concerted effort at winning her approval of a merger of EADS and .
That merger would have changed the landscape of the global aerospace industry. Not only would it have created by far the biggest company in the sector, with $100 billion in annual revenues, surpassing even mighty, it would also have provided remedies for many of the shortfalls the two companies individually suffer.
BAE Systems is a large defense contractor in the U.S. and some other overseas markets, but it does not really have a civil business anymore. With defense budgets declining, there are serious questions about what the future holds for a company with an exclusive defense exposure. Conversely, EADS is so dependent on Airbus that it has been seeking ways to strengthen its defense unit, Cassidian, for years, without much success. One of its big weaknesses is its tiny presence in the U.S., still by far the world's largest defense market. A combined EADS-BAE Systems group would have split revenues almost evenly between the civil and defense units, becoming a powerhouse like Boeing, only much larger.
And the deal would have led to much needed consolidation in a contracting global defense market. Surely the political implications would also have been felt down the road. Combining Europe's defense capabilities would have been a strong statement in politically challenging times.
But with Enders in medical treatment instead of flying with Merkel to Beijing, only a short telephone call could be scheduled between the two. Enders could do no more than outline the merger plans, make a quick pitch about the benefits he believed would accrue and seek Merkel's commitment to try to gain German government approval. A few weeks later, the deal was dead.
Angela Merkel, chancellor since 2005, was the one person to block what would have been the biggest merger in the global aerospace industry. It may not have led to the kinds of benefits business leaders outlined in their lobbying campaign, and by no means were all investors as convinced of its merits as the two companies. But it has been a long time since any government intervened in the aerospace industry so forcefully—and for purely political reasons, not over competition concerns.
Merkel simply did not want the merger and not even France's President Francois Hollande and Britain's Prime Minister David Cameron could do anything about it. On Oct. 9, a day before a regulatory deadline expired, Merkel called Hollande and told him that she did not want things to proceed. And when Cameron then tried to reach her for a last-ditch attempt to rescue the deal, she would not even pick up the phone, insiders say.
Merkel, Aviation Week's 2012 Person of the Year, has had huge influence on the aerospace industry. That influence did not simply sink an EADS/BAE Systems merger, it changed the very arc Europe's largest aerospace and defense company was on and altered the transatlantic industrial landscape.
Shortly before the turn of the year 2013, the German government became a direct and major shareholder in EADS. Germany's political establishment has long quipped about the tight grip the French government has on what it considers industries of strategic importance. Germany has not been as intimately involved in the running of its industries. Ironically, it is a coalition of conservatives and liberals—usually those that argue the loudest against state interference in private enterprise—that has changed the previous course and started reining in aerospace in a previously unheard of way.
The reasons why all of this is going on have little or nothing to do with aerospace but show how easily the industry's course can be changed by forces outside the markets or its products. For EADS and BAE, the reasons had to do with the sad realities of a Europe in turmoil, disagreement and mistrust. And they had to do with Angela Merkel's own background.
Merkel, 58, was born in Hamburg, but moved to East Germany with her family in 1954. Following graduation from high school, she studied physics in Leipzig and started a university career that ultimately landed her a job at the academy of sciences in East Berlin. Although she would quickly become involved in the first freely elected government of East Germany in 1990, she was not politically active during the Communist era. Her father was a Protestant minister and Merkel never became a member of SED, the ruling socialist party nor of the former so-called “bloc parties” that served as charade of pluralism but actually were all part of the establishment.
After the collapse of SED and the first democratic elections in East Germany, Merkel's began her political career as spokesperson for Demokratischer Aufbruch (DA, Democratic Awakening), one of the new parties that quickly merged with CDU, the conservative party. In 1991 and in the reunified Germany, she became minister for youth and women in Helmut Kohl's third cabinet and, in 1994, minister for the environment. Following Kohl's defeat in 1998, she continued to rise through the CDU ranks and took over its chairmanship in 2000. In 2005, she became chancellor, leading a grand coalition with the Social Democrats before joining forces with the Liberals in 2009. Merkel is up for reelection in September.
Merkel is often described as being extremely pragmatic, non-ideological and unemotional. But what is perhaps the most striking feature of her policies is a distinct coolness about grand visions of European integration. Helmut Kohl, her predecessor at the party's top and as CDU Chancellor, chose European integration as his overarching foreign policy goal. Merkel, it seems, could not care less about Europe or visions. Of course, Europe is important to her when it comes to protecting German interests, but Merkel certainly does not serve well as a visionary. “If you have visions, go see a doctor,” said former Social Democratic Chancellor Helmut Schmidt. That statement could well have been one of Merkel's.
If she does have a vision, then it is about fiscal discipline. Merkel has been the driving force behind efforts to bring public spending more in line with budgets. She was willing to accept the social ruptures as a consequence and was long unsure about whether Greece should exit the eurozone. The suspicion among her fellow heads of state may be mutual. Time magazine put it succinctly on the cover of its international edition recently with the words, “Why everybody loves to hate Angela Merkel.”
Merkel's skepticism of a grand, unified European community and her wariness of European partners played a key role in the decision not to allow the EADS/BAE merger and push through her own corporate governance reform at EADS.
“What really shocked us, even looking back, is the approach of the German government that followed one simple rule: If France, the U.K. and EADS management like it, then there has to be something wrong with it,” says one executive who participated in the negotiations. “But what does that tell us about European unity?” Merkel studied Russian in school and she admires the U.S. (She was one of the very few European politicians with a close relationship to then-U.S. President George W. Bush.) But France? That's a different story. Because Merkel mistrusts France, she could not allow the merger, and she believes Germany needs to own as many shares in EADS as France.
It was not Merkel alone who formed the government's aerospace policy, of course. For the details, she relied on an old ally, Peter Hintze, whom she hired as state secretary in the ministry of youth and women in 1991. Today, Hintze is the deputy economics minister, with the additional title of aerospace coordinator. Hintze was against the merger, in favor of government intervention all along.
After Enders's missed trip to China in August and his brief chat with Merkel on the phone, he never really heard back. One Enders aide says the company offered further explanations and proposed meetings numerous times only to hear that Merkel's schedule did not permit additional discussion.
In September, the merger story leaked and it was all over the news. Things were about to go terribly wrong from the industry's perspective, and everyone on the inside of the deal knew it.
“That leak was catastrophic,” says one industry official, because it put pressure of all sorts on all sides. The parties had agreed on what they would say publicly in case information about the plans became known prematurely. And so the official German government spokespersons said the two companies and the governments were in a “constructive dialog,” with an open outcome. However, on the same day, several German newspapers quoted an anonymous government source as saying there were serious concerns and approval was unlikely. Most observers are certain that source was Hintze, Merkel's top aide.
Officially, the process continued normally. An inter-ministerial working group was set up to look at the various possible implications—but Hintze never attended its meetings. The government ministries sent different people all the time, citing vacations and illnesses. But there was never an official indication that “no“ would be the answer to the proposed merger until almost the very end. Says one senior executive, “It would have been much more honest to simply say 'no' right from the start.”
By not allowing the merger, the German government not only missed what many regarded as a great opportunity for European aerospace, one that one industry official lamented “will never come back.” It also inflicted a wound to Enders that well might have led to his resignation, if EADS were a more ordinary company.
Enders has been fighting hard against the sort of government influence that prevented the merger since he took on his current job. The irony is that the same outlook on the part of Merkel that nixed the deal may have kept Enders in his job. A resignation would have led to a fundamental EADS leadership crisis that would have been difficult for all parties to handle.
Merkel's intervention marks a turn in economic policy and a departure from the previous laissez-faire attitude. Only a few years ago, it would have been unthinkable for the German government to block a merger for the reasons that were key in this case and subsequently buy a significant minority stake in a large corporation. Major concerns such as the postal service or former national carrierwere privatized more than a decade earlier and keeping the state out of business seemed like a good strategy that large parts of the political spectrum could agree on, even the German left. It also seemed acceptable that France has owned a stake in EADS since the company's inception in 2000 and Germany did not.
But that policy fell by the wayside in the wake of the global banking crisis, which required massive intervention and, among others, the nationalization of Germany's second-largest bank, Commerzbank. The policy shift that was unavoidable to keep the banking sector from collapsing four years ago had serious ramifications elsewhere, too. It helped change the mind-set of key decision makers who came to the conclusion that state intervention was a suitable measure in other areas, too.
Long before the first rumors about a possible combination of EADS and BAE emerged, Merkel had decided that German interests can only be served well in the future if the government owns an EADS stake of the same size as France to ensure the much-sought-after balance of power.
Since EADS was set up 12 years ago, the French and German sides within the company have often argued that more workshare is about to move across the border, leading to the loss of highly qualified jobs, engineering and development competencies and production facilities. None of that has happened, at least not to any noticeable degree. Similar concerns were at the core of Germany's opposition to the merger. With the Airbus business centered in Toulouse and the defense business likely being run out of the U.K., wasn't it only a question of time until Germany would become disadvantaged?
Things became serious when car manufacturer Daimler made clear that it will sell down its 15% stake in EADS over time. Daimler has long functioned as Germany's representative on the EADS board in times when it did not appear opportune to have a direct government stake. With the process dragging on over several years, Daimler became increasingly nervous and eventually told Merkel's government that it might sell its shares over the stock exchange. The existing shareholder pact regulating powers between Daimler, France's Lagardere Group, and the French and Spanish governments would have imploded.
Merkel realized it was time to do something. A plan to step in was crafted and even Tom Enders's best efforts to come up with a corporate governance scheme that would keep the government out proved to be unsuccessful. He had hoped that as part of the merger, governments would opt out. Now, more of them opt in.
Germany will, like France, control 12% of EADS; Spain's share will be 4%. The combined 28% is significantly more than the 20% previously held by France and Spain. There are some remedies, though, which make the new governance easier to cope with. Administrative board members can only be proposed by the nomination committee and each shareholder is limited to 15% of voting rights.
EADS has come up with some surprisingly positive statements about the new setup, but it is evident that, again, politics and diplomacy are at play. Following the recent clashes over the failed merger (Enders and Hintze still don't talk to each other), EADS believed the situation needed to be calmed. Ultimately, despite outward appearances, it will still be Hollande and Merkel who call the shots at EADS. Even as the near-merger recedes in time, that is not good news for the company.
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