Mega Defense Merger: EADS-BAE Plans Put Merkel Under Pressure

The planned merger of British defense contractor BAE Systems with aircraft maker EADS is putting Germany's chancellor under pressure. If Merkel consents to the deal, she will jeopardize jobs in the high-tech industry. But if she refuses, she will endanger the future of the aerospace giant. By SPIEGEL Staff

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AFP/ Airbus

It was a beautiful August day when Tom Enders, a former paratrooper and avid amateur pilot, decided to go for a spin with his hang-glider. But the short flight ended painfully for Enders when he crash-landed the glider, injuring tendons in both arms. With his arm in a sling and a plastic cast, the powerful CEO of the European Aeronautic Defence and Space Company (EADS), the parent company of aircraft maker Airbus, looked like he was wearing part of a suit of armor. It wasn't exactly an encouraging look for someone who is in the process of forging the world's largest defense group.

Because of the accident, Enders had to cancel two important events: a meeting with the French prime minister and a trip to China with German Chancellor Angela Merkel. The crash-landing was an unpleasant setback for Enders -- because he needs Merkel's support to put his ambitious plan into action.

Enders wants to merge EADS with British defense contractor BAE Systems, a move that would create the world's largest defense group, with annual sales of about $45 billion (€34 billion). The new giant would be capable of providing the entire arsenal of modern warfare, including aircraft carriers, fighter jets, nuclear submarines, satellites and drones.

But to move forward, Enders still needs approval from Paris and Berlin. Under a "shareholders' pact," the Germans and the French have the final say at EADS, a group employing 133,000 people. The two governments could thwart the planned merger at any time.

Behind-the-Scenes Battle

Since the previously secret plan became public last week, it has been clear that a bitter behind-the-scenes battle over the future of the European defense industry has been raging for weeks. There is much at stake: well-paying jobs, high-tech industry plants, future-oriented know-how, billions in revenues and, most of all, prestige.

The mega-deal affects the governments in Berlin, Paris, London and Washington. Although all four are close allies, national interests trump other loyalties in the conflict. Enders, for his part, is trying to reduce government influence so that he can run his company as efficiently as possible.

The situation is complicated by the fact that the sensitive information was leaked too early. Under British financial market rules, politicians and industry leaders will have to come up with a solution within 28 days of the plans becoming known to the markets -- in other words, by Oct. 10.

The Germans quickly assembled a task force consisting of personnel from the Chancellery, the German state-owned development bank KfW, the Finance Ministry and the Economics Ministry. The most important member of the group is Lars-Hendrik Röller, Merkel's economic adviser and head of the Economic and Fiscal Policy department at the Chancellery.

It is still unclear what the government will ultimately decide. Originally, the Chancellery planned to wait until November before wading into the takeover battle with a concrete negotiating strategy. What Merkel fears even more than losing power in relation to the company is the loss of valuable high-tech jobs, which could move to France or the United Kingdom as a result of the deal. That's the last thing she can use as campaigning begins for the German general election in 2013.

'Golden Share'

There is much at stake for Merkel in this poker game. As bait, Enders presented her with a "golden share," which would enable the German government to block a hostile takeover from strategically problematic countries.

The Chancellery currently plans to guarantee this form of influence in the long term by buying up EADS shares through the state-owned KfW Bank -- at a cost to German taxpayers of at least €2 billion. The "golden" share, on the other hand, is free, at least according to the EADS offer.

The group's lobbyists are currently on the move in a tireless campaign to point out the dangerous consequences of a failed deal. Other defense contractors have already been circling the British company like vultures, including Rolls-Royce and American competitor Northrop Grumman, which reportedly approached the British defense contractor a few months before the Europeans.

Merkel and Enders first discussed the deal in July, but insiders say that the chancellor was not particularly pleased about it. Some of her reserve can be attributed to Enders' personality. No one, not even Enders himself, would credit him with diplomatic skills. He polarizes people whenever he turns up in Berlin.

Bitter Struggle

That's because Enders is engaged in a bitter struggle with the political elite, as he tries to reduce the government's influence on EADS. Politicians, for their part, haven't forgotten the fact that Enders demonstratively left his party, Bavaria's conservative Christian Social Union (CSU), which is part of Merkel's coalition government, last year. It is also an open secret that Enders and Merkel's aviation coordinator, Peter Hintze, are not exactly fond of each other.

The situation is everything but favorable as Merkel's advisers examine the pros and cons of the massive deal. There are a number of potential advantages to the proposed merger. Cassidian, EADS's defense subsidiary, is in poor shape. Its sales were artificially inflated in recent years through acquisitions of smaller companies. This is apparently one of the reasons why Enders fired Cassidian's CEO, Stefan Zoller, at the beginning of the month.

New blood would benefit EADS, and the British have various interesting products in their portfolio, including various state-of-the-art surveillance and security technologies for the cyber-wars of the future.

The British manufacture these highly sensitive products for the Americans, which makes BAE all the more valuable to EADS, which has yet to gain a real foothold with the world's largest military power.

Complex Structure

As a so-called "prime contractor," BAE has access to top-secret American defense projects. In return, the company is only permitted to employ in these high-security areas US citizens who have undergone extensive security checks by intelligence agencies.

To allay the Pentagon's concerns about the merger, Enders and his top advisers have devised a complex dual structure with the British.

If the deal succeeds, it could do more than restructure the Western defense market. Critics fear a potential collateral effect, namely the unchecked exporting of arms to the world's hot spots.

Gernot Erler, the deputy parliamentary floor leader of the opposition center-left Social Democratic Party (SPD), warns that Germany's arms export guidelines could be circumvented as a result of the merger between EADS and BAE. "Two parties with guidelines not as strict as Germany's would then be involved in the company," he said.

Critics fear that controversial weapons could be sold through the new company headquarters in London to, for example, countries in the Arab world, bypassing the strict German guidelines. The British government's export rules are laxer than Berlin's. EADS already sells the Eurofighter Typhoon through Great Britain, because BAE is a partner in the fighter-jet consortium. An EADS spokesman vehemently disputes that the group is pursuing the same purpose with the merger.

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1. Mergers fell more often than marriages
titus_norberto 09/19/2012
Ted Turner once said after Time Warner merged with AOL: "I'd rather go back and be with one of my ex-wives than go through this again". Turner thought that he was buying AOL but in fact he was bought by them. This deal looks as dodgy as Ted's one. Take for instance BAE, according to the article is the best supplier of Boeing BUT wants to merge with EADS in order to COMPETE with Boeing. Well, I scratch my head thinking about that..., it could well be the other way around, namely BAE and Boeing taking over (eliminating) a competitor, EADS… With Perfidy Albion you can never be sure… and the Americans are naïve but desperate… All these sounds as very dodgy business to me, to say the least.
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