Europe's defence market has been far too fragmented for decades and needs the merger to consolidate its position
The proposed pan-European aerospace and defence merger between BAE and EADS may not fly; many now believe it will collapse by the UK Takeover Panel's deadline of 5pm on Wednesday. This would be more than a pity. It would be a hammer blow to Europe's industrial base and future as a centre of innovation and cutting-edge technology just as the competition moves up several gears.
There are good grounds to promote the €35bn (£28bn) merger in the face of mounting criticism from both France and Germany and, of course, the UK. A cross-border fusion on this scale is bound to raise concerns when security and strategic interests are at stake. But the overall interests of Britain, France and Germany are best served if it goes ahead.
The main argument against it is the size of the shareholdings to be held by the French and German states. Their stakes will be 9% each under the current plans (accepted by the UK) but could be an unacceptable 13.5% if both Lagardère, the French media group, and Daimler, the German auto concern, wholly divest their holdings. This, the rejectionist 45 backbench Tory MPs and the ex-chancellor Alistair Darling argue, would enable them to take the UK "to the cleaners". Philip Hammond, the UK defence secretary, says that it is a "red line".
Tom Enders, the merger's main architect and EADS chief executive, has wanted the exit of Berlin and Paris since the group was formed in 2000 – as did, to a lesser extent, his French predecessor, Louis Gallois. Angela Merkel's government is only holding on because the "étatiste" French are, and has no desire to spend €3-4bn on buying out Daimler which wants to sell and has done for some time. Lagardère, under Arnaud Lagardère, its chairman, almost sold out a few years back and will do so now if the price is right. That would certainly not be one that the cash-strapped Hollande government could afford.
Britain, in other words, could help broker a settlement that eases out the two continental states and their reluctant corporate proxies. The resistance from Paris (in particular) and Berlin might be too great. London, in that case, might not only threaten a veto through its "golden share" in BAE but also demand a holding of its own. A counter-intuitive proposal on these lines has already been outlined by Chatham House director Robin Niblett and Darling has hinted at the same.
Competing national desires to house the "BEADS" headquarters could also derail the project – though it is a given that Britain will be home to the defence business. In the face of French maximalism in recent and ongoing negotiations, Germany has reinstated a demand for the group HQ to be in Ottobrunn, near Munich (in restless conservative Bavaria) rather than Toulouse. Here, a shared tripartite solution is not beyond the wits of the players.
All three countries (and Spain) have voiced concerns over jobs, skills and investment. Here, Enders and his BAE counterpart, Ian King, have already given unprecedented commitments, talking of "opportunities, not threats" and of "growth, not cost-savings". BAE, which ill-advisedly sold its 20% stake in Airbus six years ago, regains access to a growing civilian aerospace market where the Brics are more active; jobs at Broughton, where Airbus wings are made, will be enhanced. As Mike Turner, King's predecessor, says, many of BAE's British contracts are coming to an end. Similar pledges have been made in France and Germany.
Finally, there is the fear – voiced by Invesco, BAE's biggest investor – that British defence interests will be damaged and access to the US arms market hampered. BAE's influence inside the Pentagon is declining while the US defence market is shrinking. It's true that the UK group has more secure access than EADS but the Franco-German combine did win a huge Pentagon order for air-to-air refuelling aircraft before a huge lobbying effort by Boeing reversed that decision. It has a lower security status than BAE but it does have one – and Enders and his team are welcome in Washington.
Europe's defence market has been far too fragmented for decades and needs consolidation. Europe has a substantial market share and reputation in civilian aerospace but the Chinese, Indians and Brazilians are growing challengers. If the merger fails, BAE will be prey to the giant American groups such as Boeing and Lockheed, its partner on the F35 fighter, or face break-up. EADS's defence business will be similarly vulnerable. The merger helps Europe's manufacturing retain its place in the globalised "champions league".
