BAE Systems-EADS Merger Plan - Essay Example

?BAE Systems-EADS Merger Plan: Case Study Introduction As market competition is becoming more and more intense, companies are to take up innovative strategic moves in order to ensure their long-term sustainability. The concept of merger is widely employed today with intent to defend stiff market competition and to enhance business profitability thereby. “A merger can refer to any takeover of one company by another, when the businesses of each company are brought together as one” (Coyle 2000, p.2). A look into the recent history proves that strategic alliance has best served the interests of many companies at the verge of extinction. However, unification of two struggling companies may not always guarantee their resurrection. This paper will specifically discuss whether or not mergers make economic sense with particular focus given to the reaction of UK, French, and German governments to the BAE/EADS merger. BAE Systems-EADS merger plan In the last year, Britain’s BAE Systems planned a €38bn (?30.4bn) merger with its rival European Aeronautic Defence & Space Co (Franco-German maker of Airbus civilian jets). According to a Telegraph report by Ebrahimi and Monaghan (2012), the planned merger would have formed the world’s second biggest aerospace and defence company after Boeing. If the merger had become successful, the merged entity would have achieved combined sales of ?60bn and employed 220,000 people worldwide (ibid). In addition, the planned venture would have contributed to Europe’s military efforts, developed British nuclear submarines and own airbus, and attained the status of biggest plane manufacturer in the world (ibid). Many industry analysts supported this deal as they believed that the planned merger would provide the companies with the synergies of combined operations. Proponents of this strategic plan pointed out that BAE systems have strong presence in the US market where the government is one of the largest and potential customers. Hence, EADS can take advantage of this potential strength of BAE Systems. At the same time, the planned deal might also benefit BAE Systems to improve its earnings by spreading its operational area to commercial aircraft and space satellites. The shrinking Western Defence market was also cited to justify the planned merger. The 60/40 split in favour of EADS was a major controversial term of this merger. From another view point, “the mathematical flipside for BAE shareholders is that the merger is a no-brainer at 60/40” (Boland & Kirk 2012). Anyhow, the talks over the BAE-EADS merger did not reach a mutual agreement and hence the initiative was called off later. Reaction of UK, French, and German governments UK and French governments took a favourable stand toward the BAE Systems-EADS merger whereas the German government opposed this strategic move. According to a BBC report (2012), while evaluating the approach of Britain toward this merger deal, the country particularly wanted its counterparts to restrict their influence in the new company so as to keep the strong relations with the US government. Hence, the British government needed to obtain a dominant position in the merged company. However, it must be noted that Britain’s officials took huge efforts to make this deal a reality. In a close observation, it seems that the British government emphasised more on its personal interests rather than the continent-wide interests. To illustrate, the British government particularly wanted to maintain BAE’s strong position in the huge US market and the country was never willing to spoil its good relationship with the US. The British government believed that obtaining a strategic control over the merged company would assist the country to continue its strong business relationship with US. In sum, Britain tried to decrease other countries’ political influence over the new venture. While analyzing the stance of France in the BAE-EADS merger, it seems that France was interested to make this deal a reality and was willing to compromise some of its demands. For instance, France accepted Britain’s requirement to limit France’s stake from 15% in EADS to 9% in the new company (Michaels et al 2012). Hence, France and Britain reached a mutually acceptable agreement. However, Germany wanted France to limit its involvement further and France was not likely to accept this proposal. Hence, it is clear that France also stuck to their position claiming a major position in the merged company. The French government believed that a key position in the consolidated organisation would enhance employment and industrial development in the country. The German government’s hostile approach toward this planned strategic alliance was the most crucial factor led to the abandonment of this merger. Michaels et al (2012) report that German Chancellor Angela Merkel called French President Francois Hollande to the Germany’s disagreement against the planned merger. Merkel told Hollande that the proposed venture’s demerits would outweigh its benefits expected for the Germany (ibid). Although Germany possessed no direct stake in EADS, the German automaker Diamler AG held 15% stakes in the company. Diamler had been already in the course of selling a huge portion of those stakes to a state-controlled German bank. It is believed that Germany opposed the proposed alliance primarily due to the reason that the merger would fuel EADS’s defence sales in the gigantic US market. Germany also feared that the deal would offer more potential competitive advantages to France and Britain, who already have strong presence in aerospace and defence industries. Before the telephone conversation between Merkel and Hollande, German officials stated that they had not been convinced that the deal would be good for the country in terms of industrial growth. According to a report by Michaels et al (2012), since Germany had no direct stakes in EADS, the country was offered a special share to protect its strategic interests in the merged entity. However, Germany demanded ownership of stakes similar to France’s 9% interest in the new entity (ibid). In addition, German officials negotiated for establishing a headquarters in their own country. As repoted, “while Britain and France narrowed the gap between their positions, Germany remained firm in its demands” in spite of a range of growth opportunities offered. (Michaels et al 2012). In short, the non-negotiable demands of Germany resulted in the failure of this merger. Finally, EADS’ shareholders did not support the deal when BAE’s shareholders were excited to push the deal forward. To illustrate, EADS share prices increased by 5.29 percent with the release of the news that the BAE-EADS merger was stymied by Germany; and at the same time, BAE shares dropped 1.38 percent (Blamont & Neely 2012). Evidently, most of the beneficiaries of this merger, including UK, France, Germany, and EADS shareholders maintained a very prejudiced approach toward the planned merger. Do mergers make economic sense? It is clear that shareholders’ wealth maximisation is the major objective of any company. Hence, companies wish to promote projects that are likely to add value to shareholder wealth. In this regard, a merger makes economic sense if it contributes to the financial interests of shareholders involved. Referring to the words of Brigham and Houston (2007, p. 685), under a merger process, value is created if and only the market value of the consolidated firms is greater than the sum of the market values of the firms separately. Disney-Pixar and Exxon-Mobile mergers can be considered as one of the most successful corporate mergers. Critically analysing the reaction of UK, French, and German governments to the BAE-EADS merger, it can be stated that mergers do make economic sense. It must be noted that the BAE-EADS merger was abandoned not because of its financial unsoundness but due lack of agreement between the three governments. In fact, the merger was particularly important for the Europe to dominate the global aerospace industry and to establish one of the biggest defence companies. As The Guardian reported, the European defence market has been greatly fragmented for the last several decades and the BAE-EADS merger plan was an opportunity for this market sector to consolidate its position (Gow 2012). The overall interests of Britain, France, and Germany would have best served if the merger plan had become successful (ibid). Undoubtedly, this merger would have assisted BAE Systems to obtain access to a fast growing civilian aerospace market. Market analysts indicate that the planned venture might have benefited the European defence market to effectively confront with the challenges raised by the growing Chinese, Indian, and Brazilian markets. Due to the failure of the proposed merger, the BAE is greatly exposed to the threats of giant American players like Boeing and Lockheed. Evidently, mergers are greatly beneficial in the sense that it brings economies of scale. Precisely, a potential merger would create a larger firm with increased output which in turn would cut down the average costs. Lower average costs may aid the merged company to offer lower prices for consumers. Different economies of scale may include technical, financial, and organisational economies. A merger would establish one corporate head office and hence the business operations would be more centralised. As discussed already, mergers greatly assist firms to strengthen their market position in the context of international competition. An effective merger would provide companies involved with newer and potential sources of revenues, and this situation is helpful to increase investments in R&D. Increased R&D investments may benefit the company to improve the quality of product/service offerings and thereby promote market stature and customer loyalty. Economists suggest that greater efficiency is one of the most recognised advantages of mergers. In addition, mergers really make economic sense in industries where firms are struggling to survive various market challenges. For instance, the UK government promoted the merger between Lloyd TSB and HBOS when its banking industry was underperforming. Finally, diversification is the major feature that adds to the economic gains of mergers. When two firms in different industries merge, both the firms would obtain the benefits of knowledge sharing. AOL and Time-Warner merger is an example for such a merger. Conclusion From the above discussion, it is clear that the BAE-EADS merger was cancelled mainly due to the non-negotiable stance taken by the German government. When the UK government emphasised on reducing political influence, the French government paid particular attention to obtaining more number of stakes in the merged company. Therefore, this merger failed not because of poor economic feasibility. Economists and other industry analysts opine that the proposed deal might have contributed to the consolidation of the European defence market. Mergers are really beneficial while considering the resulting benefits such as economies of scale, greater efficiency, and strengthened market position. In sum, mergers always do make economic sense. References Boland, V & Kirk, S. (2012) Lex in depth: EADS-BAE. Oct 8. Financial Times. BBC. (2012) “BAE-EADS merger cancelled amid political impasse”. Oct 10 [online] available at http://www.bbc.co.uk/news/business-19897699 [accessed 2 March 2013]. Blamont, M & Neely, J. (2012) “Europe's two biggest aerospace firms will go back to the drawing board to find new strategies after Germany stymied the world's biggest arms and aviation company merger”. Reuters, Oct 11. Brigham, E & Houston, J. F. (2007) Fundamentals of Financial Management. US: Cengage Learning, Coyle, B. (Ed.). (2000) Mergers & Acquisitions. US: Global Professional Publishing. Ebrahimi, H & Monaghan, A. (2012). “BAE Systems in merger talks with EADS”. The Telegraph, Sep 13. [online] available at http://www.telegraph.co.uk/finance/newsbysector/industry/defence/9539142/BAE-Systems-in-merger-talks-with-EADS.html [accessed 2 March 2013]. Gow, D. (2012) “Why Europe needs the BAE-EADS merger to succeed. The Guardian, Oct 8. [online] available at http://www.guardian.co.uk/commentisfree/2012/oct/08/europe-bae-eads-merger [accessed 2 March 2013]. Michaels, D et al. (2012) ‘Government Discord Derails Massive European Merger’. Oct 11, The Wall Street Journal. Read More