BAE Systems and EADS scrap merger plans after German opposition

BAE Systems and EADS announced today, four hours short of the 5pm deadline, that they had terminated their proposed £30bn merger in the face of political opposition.

The breakdown in the deal of course is not a huge shock given the weight of German opposition to a number of factors surrounding the merger, specifically shareholder equality, job cuts and a headquarters in Munich. Both companies confirmed that “it became clear that the interests of the parties’ government stakeholders cannot adequately be reconciled with each other or with the objectives of BAE and EADS.”

Given how long it is taking European governments to agree on measures to improve the eurozone debt crisis, it is hardly surprising that with national interests at stake over this deal, they have failed to reach a compromise in the month since the September announcement of talks between BAE and EADS regarding a merger.

Yet still many in the market felt that they would request an extension to today’s deadline to give the talks further breathing space and so the quick end to talks is a bit of surprise. The fact that both companies have decided to walk away now rather than opt for an extension to the merger being agreed insinuates that German opposition to the deal was immovable and had no hope of a compromise.

Both respective share prices of BAE and EADS rallied in the immediate reaction to the official confirmation that the deal was off. BAE shares rallied 6p to 325p before falling back when investors digested the news, whilst EADS shares rallied 3%.

Ian King’s position as CEO now vulnerable
The immediate focus now switches to the strength of the BAE Systems board and indeed of Ian King with major shareholder Invesco, which owns 13.3% of BAE, already voicing strong opposition to both the merger and the current strategy of the BAE board itself.

In such a public collapse of the BAE/EADS merger, the position of Ian King as CEO of BAE is now particularly vulnerable unless he can convince shareholders that despite this significant setback, BAE’s strategy is on the right path.