Power fights in the European arms industry

Friedensforum, autumn 2012 by Wendela de Vries -- In the same week the Nobel Peace prize was rewarded to the European Union, merger negotiations for what could give Europe the worlds' biggest arms company failed in the last minute due to political interests. The merger between EADS and BAE Systems (BAES) would have helped the European arms industry to survive the economic crisis and American competition. But Angela Merkel feared loss of German jobs with elections coming up in 2013. The merger negotiations gave an insight in the complex relation between economical, political and strategical interests.

Arms production value

The driving force behind the merger attempt between EADS and BAE Systems is the German EADS CEO Thomas Enders, as a former Luftwaffe officer also known as “Major Tom”. Together with his British counterpart, BAES' Ian King, he could have created a 220,000 employee company with combined revenue of about $94 billion. EADS and BAES are already working together in the Eurofighter program and in missile company MBDA. They have both invested heavily, including their own funds, in unmanned planes or drones, the best-selling item of the military aeronautic industry. Cooperation in this technology could have given them a chance to beat American and Israeli domination and produce a 'euro-drone'.

The first setback after the surprising announcement of the merger talks was a drop of share value of EADS, while BAES shares did rise. This can be explained from the fact that BAES is a nearly completely military company, and as such in rough weather due to the crisis cuts in defence spending in most Western countries. EADS however is for only 25% depending on military production and most successful in the civil market with its civil aircraft Airbus (also available in military colours). It is the success of Airbus which makes investors interested in EADS. The prospect of a merger resulting in more military production did apparently not look attractive for EADS shareholders while BAE shareholders were happy with a return of Airbus which BAES sold in 2006. Arnaud Lagardère, owner of 7.5% of EADS shares and chair of the EADS board, send out a press release to express his worries about the drop of share value. Arnaud Lagaredère is the son of Jean-Luc Lagaredère, former chairman of Matra defence company. The family Lagaredère also runs a media empire in France.

EADS government shares

Not only the market, also politics responded strongly to the merger plans. EADS is a company which is partly owned by governments: the French state has a direct 22,5% share, Germany has an indirect share through DailmerBenz. And although BAE Systems is a completely private company the British government holds a 'golden share' which gives veto power over any merger. For some time, EADS CEO Tom Enders and his predecessor Louis Gallois in vain tried to persuade the French and German government to give up these shares and make EADS a normal company, more easy to handle on the market. Apparently, European governments intend not to. In this way they can prevent takeovers of crucial European arms production by foreign investors like for example an American bank, as happened to HDW submarine shipyard in 2002.

The power struggle between EADS and the German government already turned nasty in January, when German deputy minister of Economic Affairs Hintze did send a letter to EADS calling for more Germans in top executive posts. Having no formal power over the appointment procedure, he went as far as threatening to remove development funding and export credit guarantees if such changes were not imposed. When asked questions about this at the Annual Shareholders Meeting in May, Tom Enders could hardly hide his irritation and was unwilling to give an answer. Instead, he referred the question to mr. Hintze who was 'responsible for his own actions'.

For the French government it would be unthinkable to give up its EADS share and power, because the company is responsible for the nuclear missiles of the French navy and air force. Although relatively unimportant in financial value, this nuclear production is at the core of the relation between EADS and the French state. In his farewell speech at the Annual Shareholders Meeting departing CEO Louis Gallois expressed his extreme pride that this 'Gaullist heritage' is a EADS product. Had the EADS-BAES merger been realised, the new company would have produced nuclear systems for both the European nuclear powers, as BAES is responsible for the nuclear submarines of the UK which are docked in Faslane.

But contrary to the German government, the French government had no problem with a merger, provided it could continue to extend power over the new company.

British-American friendship

One of the major reasons EADS wanted to merge with BAES is probably BAES's good position in the US. BAES generates over 40% of its revenue in America. EADS is eager also to get a firmer foothold in the lucrative American market. It has founded EADS North America and is buying itself into American companies. Note however, that this did not go as far as having Americans in executive posts in EADS. The EADS Executive Board continues to be exclusively European with a delicate balance of nationalities. To prevent the company to become 'too German' after the replacement of French Louis Gallois by German Thomas Enders for example, the French former boss of the European Central Bank, Jean-Claude Trichet, has been appointed to the board.

While EADS had to win on the American market with a merger, BAES might loose. It was risking its good relations with the Pentagon. The Americans are always very careful sharing defence technology , and the British preferential position came under threat when merger plan with a 'governments-controlled' company became known. To share technical and strategic know-how with a British private company is one thing, to share it with the German and French government is something else. BAES's biggest shareholder Invesco Perpetual, which owns 13% of BAES, expressed it concern about the merger plans and its impact for BAE orders in the US.

Not only the Pentagon, also British conservative MP's were worried about the French and German government becoming in control of BAE Systems, the 'crown jewel' of the British defence industry. Some conservatives even started a petition to keep BAES British. The British government on the other hand was supportive to the merger, seeing the economic advantages of large-scale research and production capacity. To everyone’s surprise, the British approved of a 9% share in the new-to-form company for both the German and the French government.

Head office locations

EADS defence division Cassidian is mainly based in the strongly regional rooted German companies, including Dailmer-Benz, with some 11,000 staff. The French Cassidian division only employs 2,000. Tom Enders did not manage to overcome German fears that the new company would transfer employment from Germany to France and the UK. At some point the German government even demanded that the EADS head office should be relocated to Munich. This was unthinkable for the French and the British. Disputes over head office location are exemplary for the delicacy of the national power balance in the company. In an earlier stage Thomas Enders had tried in vain to relocate EADS head offices from their Paris and Munich location to Toulouse, production site of EADS's money maker Airbus. A relocation to Munich would also be inconvenient for Arnaud Lagardère, who is said never to participate in any board meeting outside Paris. The juridical head office of EADS by the way is Leiden, the Netherlands. Not because, as EADS will have it, this is 'neutral ground' for an international company, but because of the very multinational-friendly Dutch tax laws which make it a tax heaven and enables EADS to pay little tax in production countries.

Is it good or bad the merger failed?

The merger talks did shake the landscape of the European defence industry. It is expected that EADS will increase its defence production anyhow, either in joint projects with BAE and/or in acquisitions. Analysts consider EADS Cassidian on its own too small and weak in technology, and too heavily depending on the German government. Restructuring of the European defence industry might also include the other two big arms producers, Finmechannica and Thales. For BAES, the merger talks were widely seen as putting up a “for sale” sign that will be hard to take down.

It remains the question what the Pentagon would have done, would the merger have come through. One can hardly imagine that the US would be pleased to see their top position as military export leader being threatened by Europe.

From a peace activist perspective, it is positive that government influence over the military industry is reconfirmed. It gives some, although limited, possibility to extend democratic control over profit driven exports by arms producers. Free entrepreneurship for the military industry is a worrisome perspective.

A merger between EADS and BAES would have been a qualitive step forward in strengthening the power position of European military industry. This would have crated a much stronger defence-industrial and assertive pillar for a European Union defence policy. EADS likes to play the European cart already. In the running up to NATO's Chicago summit EADS's Astrium space division executives suggested the European arms industry could provide a European contribution to NATO’s planned missile shield and that “a financial commitment is needed”. At a meeting of the European defence lobby organisation ADS in Brussels EADS executive Gallois called for more common European procurement to give the European arms industry more scale advantage, thus making it more competitive vis-a-vis American companies. A BAES-EADS giant arms company would have strengthened the lobby for a more militarized Europe.