Issue of the week: A defense megamerger goes bust

last updated 8 January 2015

“They do business differently in Europe,” said Eric Reguly in the Toronto Globe and Mail. Last week, political bickering torpedoed a $50 billion megamerger that would have combined Britain’s BAE Systems and the Franco-German EADS into the world’s biggest defense and aerospace company. Despite a perfectly sound business case, politicians in London, Paris, and Berlin, who had veto powers over the deal for national security reasons, simply couldn’t agree on how the proposed conglomerate should be owned and run. Talks ultimately descended into “what’s-in-it-for-me political bedlam,” over everything from jobs and government-ownership stakes to the location of the corporate headquarters. “So much for European integration,” said Harvey Morris in NYTimes.com. Here was an opportunity to create a European challenger to U.S. defense giants like Boeing, at a moment when the defense industry has to consolidate in the face of shrinking budgets on both sides of the Atlantic. Yet despite the European Union’s recent Nobel Peace Prize, the “self-interest of European states” still trumps “their desire for closer cooperation.”

Germany deserves the bulk of the blame, said Karl-Theodor zu Guttenberg in the Financial Times. The German government’s petty demands, such as a Munich headquarters for the new company, were driven solely by the approach of next year’s general election. Ultimately, politicians were more concerned about how the merger would play in Bavaria than about putting Europe at the heart of a redefined global defense industry. It just goes to show “how big projects and ideas can fail over rather small details.” Boeing “should send Chancellor Angela Merkel a thank-you note,” said David Nicklaus in the St. Louis Post-Dispatch. EADS, which as the parent of Airbus is Boeing’s chief competitor for commercial airliners, has been struggling to crack the U.S. defense market for years. A marriage with BAE, which counts the Pentagon as its biggest customer, would have helped EADS erode some of Boeing’s clout in Congress. Now Boeing can rest a little easier.

The future for BAE and EADS is less sunny, said The Economist. BAE could become a takeover target or face a breakup, and EADS has lost its best-case scenario for rebalancing its civil and defense businesses. Most troubling of all is what this failed deal means for the chances of solving Europe’s economic crisis. After all, “if a generally logical merger can fall apart on such petty grounds, what hope is there of a banking union?”