The real surprise about the proposal to merge BAE Systems and EADS is not that the whole thing has collapsed before it really got going, but why the managements of the two companies thought it was a good idea in the first place. As has been obvious from the start, there are precious few real gains from putting the two companies together, and the early spin that it would somehow create a transatlantic rival to Boeing was profoundly unconvincing.
It’s hard to avoid the suspicion that each had an exaggerated view of the charms of the other. EADS’ management could see a way of at least diluting the political influence of the French and German governments, while BAE could admire the vast civil airliner order book from afar, without enquiring too closely about the margins on the planes. It seems that BAE’s biggest shareholder has a more clear-eyed view. Neil Woodford at Invesco Perpetual urged the management to kick its obsession with doing deals and get on with running the business. That alone would probably have sunk the plan, even without the political problems.
There’s no disguising the blow that BAE’s board has suffered as a result of this ill-considered little adventure. The company’s position as a supplier to Airbus has been weakened, and as with any agreed merger that falls through, the directors have signalled that they don’t like the business in its current shape. The muted reaction of the shares today hardly endorses their actions. It merely signals that Mr Market didn’t really believe the deal would happen. The price is now below where it stood before the news leaked.
In retrospect, it’s probably as well that it did leak before the two sides could agree the details. Had they got that far, the momentum to continue to the bitter end would have been much harder to stop. Instead, the put-up-or-shut-up rule from the Takeover Panel, designed to prevent companies being under siege for too long, imposed an arbitrary deadline. In fact, it was nothing of the sort, since an extension would almost certainly have been granted, but it served to concentrate minds wonderfully.