So the big European merger of unequals has fallen through amid news reports that Germany's rumoured demands for the enlarged organisation become an insurmountable obstacle (http://www.bbc.co.uk: Merger of BAE and EADS 'close to collapse').
The suggestion is that Angela Merkel was against the deal and that the German Government was determined that the venture be headquartered in Germany (http://www.sharecast.com: Germany blamed for BAE merger collapse).
This follows a groundswell of shareholder opposition that appeared to be championed by BAE's largest shareholder Invesco Perpetual through its variety of funds managed mostly by Neil Woodford (http://www.citywire.co.uk: Invesco's Woodford hits out at BAE-EADS merger), along with other top ten shareholders, who questioned the merits of the deal.
Following the collapse of the deal questions look likely to remain over the futures of Chairman Ian Olver and CEO Ian King who seem to have failed to deliver on a strategy stretching back to BAE's divorce of its stake in Airbus, the significant commercial aircraft subsidiary of EADS.
Bizarrely views are being expressed that, following the lowly premium that King and Olver were prepared to sell out at (backed by the UK Government), the company could well still be up for sale leaving it open to takeover from such as Boeing, Lockheed et al as they themselves look to protect revenues through an extended geographical diversification that BAE could offer.
It strikes me that bolting on a commercial aircraft business does little to protect anticipated weaknesses in UK and US defence budgets other than allow the company to mask inefficiencies.
In all likelihood this would still lead to an efficiency drive (job losses), as capacity is reduced in line with customer demands.
Even worse was the scenario that the UK's more amenable employment law framework would ultimately see this region used to balance the books with intellectual property transferred.
Surely better that BAE drive its own efficiencies (whilst protecting UK capability and infrastructure), then grow in line with markets in the longer term.
So the board stand accused of an apparent about turn on Airbus/EADS links, and a failure to take advantage of the diversification that it represents from US DoD budget cuts, as well as leverage its position as a preferred supplier to the US DoD.
Looks to be a real failure by the BAE Board which has long looked to be an inefficient business with plenty of gains to be had by the right management.
As to the management, well this deal has shone a light on an apparent hole in the alignment of shareholders' and directors interests with reports that CEO Ian King would have benefitted from a "change of control" clause which, following the merger, would have seen all his long term share options exercised in a potential payday of up to £17.8m (http://www.dailymail.co.ukBAE chief to make £18MILLION from sell-off: Defence firm boss would hit jackpot if controversial merger goes through).
Clearly a disconnect of short term and long term interests. The Daily Mail article also goes on to suggest that King's incentives have had a peer group aligning rise of up to 300% which he clearly deserves based upon company underperformance!
As ever I am a critic of peer group alignment when the performance is clearly lacking and not reflected in results. Even more so when they are transatlantic as a huge number of weighting factors should come into play.
Once again it also raises a question mark over the so called golden share held by the UK Government (of all colours), that they have once again failed to demonstrate that they are willing to protect UK interests.
Not sure what they had to gain other than networking!
So who had most to gain amidst all this personal interest: EADS CEO Tom Enders assuming he would take control of the new entity; EADS getting BAE on the cheap and further wedging open the door to the US; Morgan Stanley and other "advisors"; the BAE board and the "change of control" as an exit strategy having failed to execute a successful internal strategy despite being given every chance with the previous takeover of Vickers etc.
It certainly looks like shareholders' interests would have been lost amidst all that for a small premium to the current share price that does little to recover the longer term discount in the share price following SFO investigations and board failure.
And then there was the threat to the dividend from the combined venture!
I am sure that if it were attractive then, fund managers and investors, such as Woodford, would already be invested in EADS and its politically motivated traditions.
Anyway despite all this the company has issued an "as you were" letter from the Chairman and Chief Executive (http://www.baesystems.com: A LETTER FROM THE CHAIRMAN AND CHIEF EXECUTIVE), along with its interim management statement which specifies trading, including lower sales, as continuing to be "in line with management expectations".
This includes forecast improvements to cashflow for the year based on the assumption that the Typhoon Salaam pricing negotiations with the Saudi Arabian government reach a satisfactory and timely conclusion (seems to be going on a bit though).
The shares are due to go ex. dividend on the 17th October with an increased interim dividend of 7.8p (7.5p), payable on the 30th November.
Related article links:
- http://www.bbc.co.uk: Merger of BAE and EADS 'close to collapse'
- http://www.bbc.co.uk: How Germany killed the merger of BAE and EADS
- http://www.citywire.co.uk: Invesco's Woodford hits out at BAE-EADS merger
- http://www.dailymail.co.uk: Intervention from major shareholder Invesco Perpetual drives BAE-EADS deal closer to the rocks
- http://www.dailymail.co.ukBAE chief to make £18MILLION from sell-off: Defence firm boss would hit jackpot if controversial merger goes through
- http://www.baesystems.com: A LETTER FROM THE CHAIRMAN AND CHIEF EXECUTIVE
- http://bae-systems-investor-relations-v2.production.investis.com: HALF-YEARLY REPORT AND PRESENTATION 2012
Related posts:
- Shareholders' rights going missing?
- BAE takes off on proposed merger with EADS!
- Part 2: BAE takes off on proposed merger with EADS!
- BAE: 2011 Preliminary Results.
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