How to crack the BAE/EADS puzzle? admin October 7, 2012

How to crack the BAE/EADS puzzle?


Negotiations can get pretty complicated at times. The latest merger talks between defence company BAE and civil aviation giant EADS to create a European Boeing are proof of that and those complications could be causing it to come apart.

Mergers are challenging enough, trying to find agreements between management teams and value for shareholders, but this one has the extra complication of five of the most powerful governments in the world having a say, each with a different, conflicting agenda.

So if you are Tom Enders or Ian King, CEO’s of EADS and BAE respectively, and you want this deal to go through, where do you start?


Start with the end in mind

Well, as Steven Covey says, you should start with the end in mind. What is it you want to achieve in the long run? Then, who do you need to get on board to make it happen?

Of course, in this instance you need everyone on board, since they can all block it, but if you look at the dynamics of the situation (and I always urge drawing it out visually, so much more becomes apparent), you will probably see one key player stands out.

In this situation? A couple of weeks ago, Enders commented that if the deal were to cause BAE to lose their Special Security Arrangement with the States then he would call the deal off. So we can probably say the US are that key player.


Negotiate backwards

Then you work backwards  from there  – what do you need to do to get the US on board?

Well, their key concern is national security, they will want to be assured that other governments will not have too much of an input on important decisions affecting American security.

So Enders will be clever. He will find a solution in the structure of the new company which will require multiple listings and firewalls. If the US subsidiary and the French subsidiaries, for example, have an impermeable Chinese wall separating them, this may be sufficient to satisfy the US.

Maybe. The US will need persuading. The amount of shares held by the other governments will be an important consideration. So how does this stand?

Well, the non-interventionist, small-government Conservative party in the UK are quite happy with minimal government ownership and, interestingly, so are Germany. Germany, however, do have a policy they want to match the same level of state ownership as the French.

So, to satisfy US requirements, the key is to minimise French state ownership of the new company.



And here Enders comes across a problem. France have insisted on keeping a 9% share, with the option of increasing it by another 4.5%. Now, given that Germany will match any French holding, this means 27% of the shares in European government’s hands. This will be difficult to push past the Americans.

So now the question, working backwards still, is how do you get France on board to reduce their stake? If you can do this, the deal is still on.

The first thing to do is recognise they do have legitimate concerns. They are worried that their own national security issues are at stake. In particular, they would be handing European defence supremacy to the UK. Enders will probably have to be extremely clever to come up with a governance structure that can satisfy both the French and US concerns simultaneously.

What else can Enders do to persuade France to reduce their stake?


The art of the deal

The art of the deal is to make sure the needs of all the key players are met and to identify any dealbreaker then work out what can be done to resolve this. If French state ownership is the dealbreaker, what can be done to resolve this?

Well, perhaps it is to recognise that their concerns are not that legitimate after all. Maybe they are just playing brinkmanship, trying to force as good a deal as they can from any concessions that they will eventually make.

So, it’s interesting that this week there have been counter developments in both Germany and the UK. The Germans’s have insisted that there needs to be an HQ within their borders. I say “an HQ” because there is likely to be another in Toulouse, one in London and yet another in Arlington, Virginia. Four HQ’s does seem quite a lot! So, who am I to say but maybe it’s just a counter tactic, something that can be dropped easily at the last moment “for the benefit of the deal”.

And in the UK, 45 Conservative MP’s have signed a petition saying that if there is any state ownership of BAE beyond the “golden share”, the deal should be vetoed. Again, it just seems a great counter-ploy: “Sorry, M. Hollande, you will have to reduce your share, otherwise we wont be able to stop our MP’s blocking the deal. It’s not us, you see…”

And apparently Hollande does want the deal to go through. So, if this is true, what else is available to Enders?

Well, for a start, he can point out that liquidating their shares will produce several billion euros of income – not an irrelevant factor in these times of austerity. How many pensioners’ benefits would be saved by that windfall?

He can also point out that if the deal doesn’t go through, one of the main beneficiaries would be EADS major French competitor, Dassault, who just happen to be owned by Serge Dassault, a right wing senator and owner of Le Figaro, a long-time critic of Hollande. Furthermore, if it didn’t happen, BAE would quite likely be bought by an American company like Lockheed and that would be the end of long-held dreams of a European defence giant. In these days of greater European defence integration, losing an opportunity for this would be quite a blow.


Deal in the balance

So the deal is in the balance. Will it, won’t it?

The other complexity with dealing with governments is that they don’t move quickly. They rarely give you an immediate answer, they usually launch inquiries. But the UK Takeover Panel needs an answer by 5pm Wednesday October 10th. Expect phone lines to be buzzing. But expect a deferment too.

And if this big issue does get nailed, will that be it?


The voter in Ohio has his say too

Ha, of course not. This is an American election year so if the US are a key player, the voter in Ohio is a key player too.

And Seattle. The rationale of this deal is to create a European Boeing. Well, expect Boeing to have a say in that. And very successful lobbyists they are too.

Which is why it was very interesting that last week, the EU pressed the World Trade Organisation for a $12bn penalty tariff on the US for illegal subsidies to Boeing. Coincidence? Probably. But this particular negotiation has been going on for 7 years, the situation is not getting any simpler.

But, then again, who said negotiations are simple?