When Angela Merkel shot down the merger of EADS and BAE Systems a year ago, it looked like politics killing industrial logic. Combining the European aerospace groups would have mitigated their respective cyclical vulnerabilities and created significant cost synergies. The merged company would have been powerful enough to compete with America’s Boeing on an equal footing both in civil aviation and defence.
That may yet prove to be the judgment of history. But right now, it looks like shareholders should be grateful for Merkel’s intervention.
BAE shares have gained 37 per cent within the last 12 months; EADS are up by 75 per cent. Both have strongly outperformed their respective local stock markets.
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This highlights the merits of tough corporate self-help. The collapse of the proposed deal forced BAE and EADS to rediscover their core strengths, and to become more shareholder-friendly.
Both decided to redistribute cash to investors via multi-year share-buyback programmes worth Euro 3.75 billion in EADS’ case and £1 billion (Euro 1.18 billion) in BAE’s. EADS made progress in revamping its governance structure. The influence of European governments was pruned, bringing the aerospace group a big step closer to being a normal company. Airbus, EADS’ civil aviation business, is also benefiting from a cyclical upturn.
It is guesswork how the shares would have fared had the deal proceeded. Assume optimistically the combination’s value would have risen in line with BAE’s and EADS’ shares over the last year, and that shareholders received their proposed 40 per cent and 60 per cent proportions of the totality.
Add back cash paid out in dividends and buybacks, and there would have been a transfer of Euro 5 billion from EADS’ to BAE’s investors: the UK group would have benefited from the premium in the proposed merger terms and EADS’ stronger relative performance.
Of course, this is only a snapshot. Today, BAE is suffering amid doubts about key contracts, as the company flagged on October 10. As the defence and aviation cycles turn, BAE’s relative fortunes could improve. Either way, it’s clear the merger wasn’t the only option available to the companies to create value for their respective shareholders.
