France’s silly stake obsession could kill BAE-EADS

October 8, 2012

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

When EADS and BAE went to the French government with their merger project back in July, they were greeted “as if by a Parisian waiter smoking on the pavement, who makes sure patrons understand they’re not welcomed”, says one investment banker involved in the talks. Not that Paris was opposed to the deal. But it made for an unexpectedly important decision to take at a time when the new socialist government’s energy was focused elsewhere.

So the first reaction in Paris – and to be fair, in other capitals – was to raise objections to the deal and set out a series of “conditions” to be met. The merger’s initiators – the chief executives of the Franco-German Airbus maker and the British defence group – wanted to do away with the complex Franco-German shareholding and governance at EADS. But Paris’ insistence on keeping a significant stake in the future company has triggered a chain of counter-objections that could end up killing the project.

The French state currently owns 15 percent of EADS, which would be diluted to 9 percent once the merger is completed. Ideally the stake would be sold down the road, to soothe political concerns in London and in the United States – which will also have to approve the deal. But France doesn’t want to be seen as being forced to sell the shares or be involved in a “privatisation” – still a dirty word in some circles of the French left.

That appeared to be accepted by the UK, and the two merging companies’ CEOs seemed resigned to it – as long as Paris indicated it wouldn’t seek to increase its stake further. But that in turn raised concerns in Germany, which wants to remain on par with the French, and presented demands of its own.

In the runup to an important Oct. 10 deadline, there is still ample room for the ultimate compromise – since no one will want to be held responsible for the deal’s failure. But the difficulties started with French demands. No one seems to have explained to President François Hollande that France would remain influential enough in the new company with a golden share and dispositions to protect strategic secrets. It may be time for a crash course in business basics.

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There have been few mergers over the years which can truly be considered a success other than in superficial terms. Takeovers can work when commercial or financial discipline needs to be brought to bear on a failing target or when an industry needs to thin down and the best bits can be kept in a business with sufficient scale.

Academic studies and stock market results show mergers generally destroy capital and skills. Failures can be all the more sever when dealing with businesses in highly complex industries where established patterns of working might take years to change or integrate.

So why do these two sets of management want it – the easy life! They are each under financial stress and want to hide from reality.

Why do governments want it? Probably a good helping of naivety and gullibility but in the case of the Germans and French and much of the UK political class, the prospect of creating an uber-business for pan-European defense production makes them salivate. It will help them destroy the ability of the UK to have independent forces and advance their cause of an EU superstate.

This is very worrying indeed for those who favour an independent, democratic Britain.

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