Latest on the proposed EADS-BAE merger

ANALYSIS: BAE and EADS merger talks

By Murdo Morrison

I've been following the fortunes of EADS - and to a lesser extent BAE Systems - for over a decade but news of merger talks between the two European giants came as a surprise to me and I think most analysts

We'll be analysing and commenting on what a potential merger could mean in detail in the 18 September issue of Flight International (available to buy and to tablet subscribers on the iPad on Saturday 15th), but here are some very initial thoughts:

1. The merger will give EADS long-sought access to the US defence market. BAE has since the mid-2000s been a major US defence contractor. But will it help EADS achieve its ambition of becoming a fully-fledged US prime? Giving the Franco-German giant access to some of the more sensitive parts of BAE's defence technology assets may fall foul of the US's security watchdogs. Will they have to be divested? The merged business will certainly have scale in the US defence market. But will it be allowed to remain in the most strategically-important and profitable niches?

2. This certainly fits with EADS's strategy of diversifying its business away from over-dependence on Airbus, which has been rather frustratingly growing in terms of revenue and profitability for EADS. Ironically, BAE divested its 20% stake in Airbus six years ago and the former BAE Airbus operations in Broughton and Filton are now owned by EADS. The merger will not affect the Airbus business.

3. Where does this leave the other big European aerospace and defence groupings? Thales and Safran have long been talked about as possible marriage partners and brides for EADS, although there are supply chain competition issues. Dassault Aviation - in which EADS has a legacy 46% stake - will remain an independent business as long as scion Serge Dassault is alive and well. After that...who knows? As for Finmeccanica, it expensively bought into the US market with its acquisition of DRS. That has proved a difficult assimilation and the Italian company is hurting financially. Italian defence budget cuts and problems with 787 production have not helped. Finmeccanica and BAE were seriously flirting with eachother a decade ago after being excluded from the tri-nation merger that created EADS. An even bigger EADS/BAE would leave Finmeccanica even more isolated.

4. Don't forget the UK. EADS has always wanted to be seen as a part-British company in Europe's biggest defence market. This would make a merged EADS/BAE truly the UK aerospace and defence "champion" and marginalise other pretenders to the throne such as Finmeccanica (owner of AgustaWestland among other businesses) and Thales.

5. Who gets to run it? This would be almost the most interesting show in town as executives jostle for top positions in a clash of corporate cultures. Tom Enders, as CEO of the 60% shareholder, would presumably have to be boss. But where would the Brits fit in? And where would the headquarters be. Twelve years on from the creation of EADS, the European company still has two HQs - in Paris and Munich - and many duplicated functions. It is even registered in neutral Amsterdam to avoid conflict on the two sides of the Rhine as to where the company should file its accounts.