EADS/BAE Systems Merger?

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Like a lightning bolt out of a clear blue sky came the announcement today from BAE Systems that it has engaged in merger talks with EADS, or, as it put it “about a possible business combination,” which would make the group the biggest defense company in the world ahead of Lockheed Martin.

The latter confirmed in late afternoon that the talks are centered on a project which would entail 60% of the new group being held by EADS shareholders and 40% by those of BAE Systems.

The BAE Systems statement was issued after unusual share price movement on the London Stock Exchange. It said the companies “believe that the potential combination of the two businesses offers significant benefits for all stakeholders, over and above their individual business strategies,” and that “in particular, they believe that the combination of the two complementary businesses offers the opportunity of greater innovation, long term financial stability, and an extended market presence, which will enable them to compete even more effectively on the world stage.”

Both groups stressed that any agreement on the terms of a potential combination will require approval by their respective Boards and “would be subject to, amongst other things, a number of governmental, regulatory and shareholder approvals.”

Approval is being sought not only from the “home” governments of the two companies -- UK, France, Germany and Spain -- but also from Australia and Saudi Arabia where the groups have major projects and, of course, from the United States. One of the major issues is to try and preserve a sort of firewall around some of BAE's activities to enable it to continue supplying the US armed forces.

The two groups stressed in their respective statements that there “is no certainty at this stage that the discussions will ultimately lead to a transaction.”

This announcement might explain why senior management from EADS were remarkably absent on Monday and Tuesday from the annual Summer Defense University organized by French parliamentarians and which is the biggest informal gathering of stars and stripes and defense CEOs in Europe. Louis Gallois, CEO of EADS until earlier this year, was a habitual guest at the do as were the director of communications and others. Tom Enders, the new CEO, did not attend, neither did the director of communications while Marwan Lahoud, who oversees the group's strategy and marketing, made a very brief appearance. He obviously had other things on his mind!

And the announcement will have taken more than one person by surprise as there was not a peep or squeak about a possible move in this direction by Europe's two biggest defense groups over the whole two days: neither over coffee, nor even over champagne or rum in the evening when tongues might have loosened.

If the merger does take place it will create the world's largest defense company in terms of arms sales, according to figures supplied in early 2012 by SIPRI (Stockholm International Peace Research Institute).

SIPRI ranks Lockheed Martin first with total arms sales (in 2010) of $35.730bn, while the combined sales of BAE Systems (ranked 2nd) and EADS (ranked 7th) would be $49.240bn.

The new merged group would also be by far the world's largest in number of employees with 219,890 (2010 figures), far outstripping Lockheed Martin's 132,000.

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