BAE merger deal 'too difficult'

Defence Secretary Philip Hammond said the proposed merger of defence giant BAE Systems with French rivals EADS collapsed because it was “too difficult” to reconcile the differences of the governments involved.

Mr Hammond sidestepped questions over whether the French or the Germans were to blame for the failed £28 billion deal.

He said BAE now faced "challenges" and warned it must "evolve".

"The British government has always understood the attraction of building what would be a world leading defence company but it had to be done on the basis it was in Britain's national interest and we set out our requirements to make that happen and the French and German governments have done the same and obviously the company is looking at all of the facts and all of the stakeholders and has just decided it was too difficult to progress this project further."

Asked if the sticking point was the refusal of the French and the Germans to give up sufficient control over the company, Mr Hammond said: "Yes, our view is that for this company as a merged entity to become successful it must be free to operate as a commercial company free of undue control or influence by any single government.

"That is something the company has decided it is not able to achieve."

The deal would have created a defence titan with combined sales of £60 billion and more than 220,000 staff, with around 52,000 employees in the UK.

BAE said it had become clear that the interests of government stakeholders - including those in France and Germany - could not be reconciled with each other or with the company's objectives.

Mr Hammond said the Government's main objective had been to protect the UK's security interest and British jobs.

"We have had a concern throughout about the level of state shareholding, we've made clear we want to see a reduction in the holdings by governments and that's an issue I know the company has been discussing with the other governments involved.

"I think what's happened is looking at all of the issues that would have been necessary to make this deal work for all of the parties the companies have just come to the conclusion that they have got other things they can do."

Unions believed the link-up would have created a strong company to guarantee jobs in the long term.

Mr Hammond said: "It's operating in a world where many defence budgets are being reduced, ours has been reduced, the Americans' defence budget will be reduced and it is going to have to evolve its business model to be effective in a different climate in the future, that's a challenge for the management team going forward."

BAE chief executive Ian King said the British business remained "strong and financially robust" and added: "We are obviously disappointed that we were unable to reach an acceptable agreement with our various government stakeholders."

Under Takeover Panel rules, BAE and Airbus parent EADS had until 5pm tonight to announce the terms of the merger, scrap the proposal or ask for an extension to finalise their plans.

It is believed Germany dealt the latest blow to the troubled deal, with reports suggesting that Chancellor Angela Merkel opposed the merger.

France has a direct stake in EADS while German influence is held through a 22% stake owned by car maker and industrial group Daimler. Reports suggest that Germany was insisting on a 9% stake in the enlarged group to match France's holding.

But British politicians voiced concerns over the level of Franco-German ownership when the UK would have no direct stake.

In its statement, BAE said it had had a great deal of "constructive and professional engagement" with respective governments but could not reach an agreement.

Mr King added: "We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world-class and complementary businesses to create a world-leading aerospace, defence and security group."

EADS chief executive Tom Enders said it was a "pity" the companies did not succeed but added: "I'm glad we tried".

As well as the political wrangling, major shareholders have also put the deal under pressure.

BAE's biggest shareholder, Invesco Perpetual, which owns more than 13% of the group, said it did not understand the strategic logic of the merger and is worried it will threaten BAE's "unique and privileged position" in the US defence market.

A UK Government spokesman said: "The two companies will remain as successful independent companies, each with a significant presence in the UK. The Government has always been clear that it could see the commercial logic of this deal but that it would only ever work if it met the interests of all the parties involved.

"Today the two companies decided that a merger cannot be concluded on this basis."

PA