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News Analysis

Executives’ Missteps Doomed Aerospace Merger

PARIS — No sooner had negotiations over the would-be aerospace mega-merger of BAE Systems and European Aeronautic Defense & Space collapsed than the recriminations began.

It was never going to be a sure bet, given the complexities of the two companies’ operations and the political sensitivities that are almost always stirred by the prospect of a cross-border combination of high-flying industrial champions.

But regardless of what the companies obviously felt was a compelling rationale for the deal, which they called off on Wednesday, analysts and industry executives say the EADS and BAE managements may not have fully fathomed that their merger mission was as much diplomatic as economic. In any case, once word of the negotiations leaked out and made headlines on Sept. 12, months of back-channel discussions with government leaders were suddenly thrust onto a public political stage, where German opposition ultimately doomed the deal.

Whether Thomas Enders, the German chief executive of EADS, might have eventually been able to get his home government’s sign-off if the discussions had remained quiet, is anyone’s guess. After all, in midsummer he had received a green light from Berlin to engage in exploratory talks with BAE, according to people involved in the negotiations. But after the news leak triggered a British regulation that put a 28-day deadline on the negotiations, the companies were in a race against the clock.

“The speed of states isn’t the speed of commerce,” said Olivier de France, a defense policy analyst at the European Council on Foreign Relations.

The precise consequences of that failed exercise for the companies and for the affected countries are still unclear and may not become apparent for months. Investor confidence has been shaken, at least temporarily, in Mr. Enders, and in Ian G. King, his counterpart at BAE. Some wonder whether the two companies, having found less fertile ground in Europe than hoped, might begin to set their future sights for growth abroad.

“I think it could create some question marks as to where investment is placed in the future,” said Howard Wheeldon, director of policy at the British arms industry trade body ADS.

In refusing to grant the merger its full blessing, without attaching strings the companies would not accept, Germany judged that the country had more to lose — in prestige and in future jobs — than to gain. And for that, some blamed not only the German chancellor, Angela Merkel, but the rough-edged Mr. Enders as well.

“Tom is an industrialist, not a statesman,” said one person close to the negotiations, who spoke only on condition of anonymity because the discussions were supposed to have remained confidential. If Mr. Enders erred, this person said, it was in “trying to serve the interests of his company and ignoring those of his government.”

Others gave Mr. Enders significant points for trying. “This will go down on his résumé as a failure,” said Alexandra Ashbourne-Walmsley, a military and aerospace consultant in London. “But it was quite a bold move and showed he was not prepared to be a stooge.”

Since EADS’s creation in 2000 from a combination of French, German and Spanish aerospace assets, its management — under Mr. Enders and his predecessors — has chafed at the frequent attempts by government stakeholders to influence decisions at the company. So it is no small irony that the merger plan — which would have expressly limited the states’ power to a veto of hostile takeovers — was brought down by exactly the kind of political interference he had hoped to end.

“This is proof of concept that European integration and cooperation doesn’t work,” huffed one frustrated EADS executive, who insisted on not being named for fear of political repercussions. “Parochialism is not the way forward.”

To be sure, the talks were also bedeviled by a couple of bad breaks.

The first came just weeks after the two companies had quietly informed the British, French and Germans in July of their interest in pursuing a merger and had received the governments’ O.K. to try hammering out a deal, people involved in the negotiations said. Mr. Enders had been expected to accompany Mrs. Merkel on a trade mission to China in late August. But after he fractured both of his arms in a hang-gliding accident, he was forced to bow out of the trip, losing a prime chance to quietly lobby for her support of the merger.

Barely two weeks later, news of the talks was leaked to the press. Because BAE is a London-listed company, the leak triggered strict British rules that oblige the parties in a potential merger or takeover to make public a detailed offer to within 28 days — or walk away for at least six months.

Leaks about merger negotiations are so rampant in European investment banking circles that companies systematically draft a “leak announcement” — containing the broad outlines of the deal — whenever discussions begin in earnest. Both BAE and EADS had ones at the ready, which they issued within hours of the first headlines hitting the newswires. But from that point, the companies were forced to woo the three governments in the full spotlight of the news media intent on every twist and turn in a potential $45 billion deal.

Some analysts said the public pressure might have heightened concerns in Berlin that supporting the merger could have risked high-technology jobs in Germany — a gamble Mrs. Merkel and her party might have been unwilling to take before federal elections next year.

“Because the industry and the commercial actors don’t have the same shackles as the institutional actors, they are always a step ahead, trying to lead the way forward while politicians are lagging behind,” said Mr. de France, of the foreign relations council.

Now the two companies will be under pressure to convince investors that their businesses still have a healthy future as stand-alone entities. But analysts expect them to continue trying to expand in emerging markets like China, India, Brazil and the Middle East in search of customers — especially in the military arenas — given the steady pressure on defense budgets in Europe and the United States.

In entering into talks with BAE, EADS — the parent company of Airbus, the commercial aircraft maker — “effectively admitted weakness, explicitly acknowledging Airbus’s cyclicality,” said Nick Cunningham, an aerospace analyst at Agency Partners in London. “A failure to get it done now leaves EADS exposed to the wrong side of a cycle on both sides of its business,” he said, “given the outlook for European defense budgets and the civil aerospace cycle.”

For BAE, “the failed merger will leave the firm much more exposed to uncertain factors beyond its control, such as major declines in the U.S. defense budget and potential losses in an increasingly competitive international defense market,” said David Reeths, director of consulting at IHS Jane’s, a consulting and analysis firm.

Others were reluctant to rule out the possibility that EADS and BAE could eventually try again.

“I think there is probably going to be another opportunity, perhaps in six months to a year, for them to have another go at this,” said Mr. Wheeldon of ADS. “I don’t thing the curtain is fully down,” he said. ”This is a chance for all the actors to draw a very big breath and perhaps think again.”

A version of this article appears in print on  , Section B, Page 5 of the New York edition with the headline: An Aerospace Merger Undone by Politics, Not Economics. Order Reprints | Today’s Paper | Subscribe

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