Does the proposed merger between BAE and EADS make good commercial sense?
YES
Peter Luff
The proposed deal reflects the underlying reality of the European defence market. Some kind of consolidation in the market was inevitable and, on the face of things, the deal should be good news for UK industrial and defence interests. However there are many complexities – what the US authorities will make of it, what it means for the UK-France relationship in defence and whether Lockheed Martin will be relaxed about maintaining the current work share arrangements on the F35 programme. Given the fact that half of BAE’s business and shareholding is already in the US, and that the submarine and warship building enterprises will have to be fully protected to reflect the UK’s sovereign requirements, it is very likely that this deal will help sustain engineering skills in the UK. But it does depend on the detailed negotiations that will now happen.
Peter Luff is a former defence minister and Conservative MP for Mid Worcestershire.
NO
Mark Slater
Bigger is usually better for the management of quoted companies, but improving shareholder value by combining two large companies is very unpredictable for their owners. The outline terms of the deal between BAE and EADS deal look more like a takeover of BAE than a merger, but the premium appears to be a relatively modest 15 per cent. There are hints about significant cost savings. Yet these will be difficult to deliver as the approval of multiple governments is required and many operations will need to be ring-fenced for national security reasons. BAE’s high dividend yield also seems to be under threat after 2013. There is some attraction in reducing BAE’s exposure to US defence spending, but management will need to do more than talk about creating a “European champion” to convince shareholders that this deal makes sense.
Mark Slater is chief investment officer of Slater Investments.