Defense Issues Seem No Barrier To EADS Merger with BAE

 - September 14, 2012, 1:15 PM
EADS and BAE already cooperate in the Eurofighter Typhoon program but their planned merger would create a European defense group to rival their main U.S. competitor Boeing.

At first glance, the proposed merger between EADS and BAE should not pose problems for competition regulators on either side of the Atlantic, from a defense perspective. There is very little overlap between the businesses. “It’s a great strategic fit,” one EADS official told AIN. However, that may not stop companies such as Finmeccanica or Thales from raising questions about the consolidation of first-tier defense contractors in Europe. “But we all know there has to be a consolidation; there’s not enough budget money to go round any more,” another EADS official told AIN. EADS shareholders will hold 60 percent of the equity in the combined group, with BAE having the remaining 40 percent.

In the UK, BAE Systems has competed against EADS for cyber security business through its Detica subsidiary, but this field is replete with potential suppliers. In Europe, the two companies have not competed for defense contracts recently, and are already partners in the Eurofighter and Panavia combat aircraft consortiums.

In the all-important U.S. defense market from which BAE Systems derives more than 50 percent of its turnover, EADS remains a small player with only the Eurocopter business of any significance. Financial journalists have written that EADS will encounter problems with the Pentagon over security accreditation. In fact, EADS North America already has a Special Security Agreement (SSA), similar to that enjoyed by BAE Systems. Among other things, an SSA ensures that only the American citizens working for a foreign-owned company can have access to certain classified data. “However, that will not prevent Boeing from raising objections over the leakage of technology, or European government influence,“ predicted a third EADS official to AIN.