BAE Systems Faces Challenges Following A Failed EADS Merger – ValueWalk Premium

BAE Systems Faces Challenges Following A Failed EADS Merger

The merger discussions between Britain's BAE Systems plc (LON:BA) and Airbus parent, European Aeronautic Defence & Space Co. have hit bumps in the road, after Germany has insisted on French parity in a newly-combined company and Britain's opposition to the continuous government influence.

BAE Systems Faces Challenges Following A Failed EADS Merger

But, there's more to the failed $45 billion merger talks.

Without a merger, BAE Systems plc (LON:BA) could be viewed either as a company lacking a strategy, or as a potential takeover target by U.S. rivals. Options for the company could include either selling its independent U.S. business, or remaining independent and trying to achieve growth though contracting in the global defense sector, reported Reuters.

An equities manager at a British investment house with a BAE stake said, “BAE sees their defense earnings going down, what do they do about it? They either get into bed with someone going up, like EADS, or they team up with someone who can help them rip a load of costs out and get economies of scale, like a Rockwell Collins, a General Dynamics, or a Lockheed Martin.”

“The conspiracy theorists say BAE Systems plc (LON:BA) is hoping to flush out a bid from one of the U.S. prime contractors.”

But, the company's plans could sink, thanks to the U.S. government's reluctance for additional consolidation among contractors and reduced competition. According to Reuters, some analysts believe this attitude may change, since BAE is one of the largest weapons suppliers to the Pentagon.

Societe Generale defense analyst Zafar Khan said to Reuters, “BAE's strategy has taken it deep into UK and U.S. defense, but both of those markets are in deep trouble over the medium-term, but at the moment doing nothing is not really an option for BAE.”

There's also the possibility of the merger going south from the political and regulatory challenges, BAE could be left alone on a deserted island, and Ian King, its chief executive of four years, could be held to answer questions about the company.

One unnamed source said, “BAE doesn't have a ‘Plan B' as such, it's the deal with EADS, or back to trying to drive growth from defense and cyber, which is pretty limited.”

Furthermore, one analyst believes King would get his walking papers, given his troubled relationship with BAE's top shareholders.

Espirito Santo analyst Ed Stacey said, “It would be tough for King to go out on a roadshow saying he is completely committed to his strategy and is happy with his portfolio, if the EADS deal doesn't happen.”

Regardless, King's main obstacle is just getting a deal completed.

A BAE investor and equity manager said, “The risk is that everyone walks away and BAE is left like the emperor with no clothes. If they do a deal with EADS, King has won them a massive get-out-of-jail card. If they don't, the company is very exposed.”

BAE Systems plc (LON:BA)'s shares are trading at 320.96 pence, below their price when the deal's news had been leaked. While they initially rose, shares dropped due to political and regulatory concerns.


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