Reaction to the EADS-BAE Merger Talk

Political, regulatory and stakeholder hurdles loom large

Alanna Petroff 13 September, 2012 | 11:12AM
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Investors and analysts are carefully scrutinising the prospects of a merger between the London-traded BAE Systems (BA.) and the Euronext-traded EADS (EAD). Concerns abound over the companies' ability to secure regulatory and shareholder approval for the potential deal.

There was an initial burst of investor euphoria when news reports announced a potential merger of the two companies, and the companies eventually confirmed the talks. But now skepticism is taking hold. Shares in BAE have deflated after a strong post-announcement rally, and shares in EADS are trending lower.

Morningstar analyst, Neal Dihora, has this to say about the deal in his latest research note:

"The potential synergies around a deal are ... difficult to quantify as there will likely be political hurdles to closing or consolidating facilities and reducing work force. Still, with a slowing defence spending environment around the Western world, it appears to us a sound move to combine forces and reduce the number of competitors offering similar goods in the marketplace. A similar combination for a single European aerospace giant was attempted more than a decade ago. Should the deal go forward, the company would appear similar in sales mix to Boeing (BA). However, we don't believe this would change the competitive dynamics in the aerospace or defence marketplaces."

When it comes to what a newly merged company might look like, this is what Dihora envisions:

"EADS management has stated in the past that it would like to get to a 50/50 type of balance between its Airbus and other businesses, by sales. Currently EADS generated around two thirds of its €50 billion in sales from commercial airplanes and one third from other areas, including defence, helicopters, and satellites. BAE Systems generates £19 billion in annual sales from defence. Using the current EUR/GBP rate of 1.25, BAE would bring €15.2 billion in sales to EADS, assuming to eliminations. The new company would generate more than €65 billion in sales, with an almost 50/50 split between commercial airplanes and other sales, mainly to defence.” 

To learn more about EADS and its competitive advantages within its industry, watch the video: 4 Companies with Competitive Advantages.


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Airbus SE158.92 EUR-0.92
BAE Systems PLC1,386.00 GBX-0.79Rating
Boeing Co174.52 USD1.34Rating

About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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