In theory, the proposed merger between BAE Systems and EADS, the European aviation manufacturer, makes sound commercial sense.
In reality, the deal would require such a delicate balancing act between competing interests that, without cast-iron agreements over governance, it has the potential for disaster.
The chief advantage of the £28 billion pound deal is economic. Combining the defence expertise of BAE with the world's largest civilian aircraft manufacturer would create economies of scale that would provide a competitive edge at a time when defence contracts are shrinking both across Europe and in the US. Both businesses would also be bolstered by the tendency of the demand cycles for civilian and military aviation to balance one another.
The main stumbling block is political, with increasing concern over Britain's ability to safeguard defence security and jobs. The French government currently holds a 15% stake in EADS. This would be diluted to 9% of the merged company but while the UK wants that to reduce over time, France wants to increase it to 13.5% and Germany, with no direct stake at present, wants to match the French bid. If that were to happen, the UK would have sold its biggest defence business to a company that was 27% owned by foreign governments. The British Government's golden share in BAE has only a symbolic value of £1 but it prevents non-UK sharholders from owning more than 15% of the business. It would be transferred to the new company but would lack the clout of the French and German shareholdings. As Alistair Darling, the former Chancellor, said, this risks the UK being taken to the cleaners, not only in regard to defence but in safeguarding jobs, with industrial shareholders in France and Germany able to exert considerable influence.
The Defence Secretary Philip Hammond's meeting with his French and German counterparts yesterday was on the eve of the deadline for a request to extend negotiations. For a government which had appeared supportive of the merger, this was hopelessly late. Mr Hammond was able to announce clear understanding of the red lines of the governments involved. This was progress but his own lines should have been drawn more firmly at a much earlier stage of the negotiations.
The merger could help BAE Systems to adapt to the slump in demand for defence and aerospace manufacture. The UK defence budget accounts for a quarter of its business outside the US but, as the cancellation of aircraft carriers shows, order books are shrinking and jobs are at risk, not least in Scotland.
Although the American defence budget is due to be cut by £300bn over the next 10 years, it will remain a major part of BAE's business and entree to US defence contracts is a key attraction for EADS. The worry for British shareholders is that creating a giant European company will damage prospects in the US. BAE currently has a stake in building the Lockheed Martin F-35 Lightning II Joint Strike Fighter, the most advanced manned combat plane. But continued sharing of such highly sensitive technologies cannot be taken for granted.
This is a merger with consequences far beyond the commercial ambitions of two significant companies. It would be a wise move to extend this afternoon's deadline for further negotiation.
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