BAE Systems (BAE), a European weapons manufacturer is in talks with EADS, a major European aerospace company, regarding a merger worth around £30bn.
BAE has said that that a “combination of the two complementary businesses offers the opportunity of greater innovation, long-term financial stability, and an extended market presence, which will enable them to compete even more effectively on the world stage.”
EADS would end its reliance on the cyclical airbus business, and gain a strong entry in the US defense market.
BAE had previously moved into the US market, but is suffering due to a slowdown in defense spending. A merger with EADS would mean the joint company could use this strategic placement to move further into the US market. It would also place the company in a good position to move into Asian markets, which have been increasing their spending on weapons, and are likely to do so in the future.
The movement into the US is also potentially problematic for existing US companies and government agencies. The merger would make the resulting company a direct competitor to Boeing and Lockheed Martin.
While the joint company would remain the sixth largest defense contractor in America, the combined international sales would create a company with larger global sales than both US names. The US Pentagon may also act as a barrier for the merger, with BAE previously stating it would walk away from a deal if US constraints negatively impact its relationship with the Pentagon
There are also major political barriers for the companies to deal with on the continent, as governments in the UK, France and Germany all have fingers in the pie and would need to approve the merger. German and French concerns surround increased UK influence in the combined business.
Particularly for Germany, job losses are a major concern if manufacturing plants (and plans) are altered. The joint company would also need to ensure appropriate ring-fencing of sensitive contracts such that intelligence is not leaked between parts of the business. Together, the two companies operate in the UK, USA, France, Germany, Spain, Sweden, South Africa, India, Saudi Arabia and Australia.
In the UK, Nick Clegg, deputy Prime Minister, is very supportive of the merger, while Prime Minister Cameron has said “BAE must diversify and expand into new markets,” for the “UK to retain a national defense industry”, although business sectretary Vince Cable has witheld his view so far. The UK government has a key stake in BAE, with veto power. Many see the support of the merger as a strategic move on the part of the government in an effort to become more Eurocentric.
Trading opportunities resulting from this potential merger include trades in BAE and or EADS as well as their competitors. When merger talks were announced, the share prices in both companies went in different directions based on the perception of benefit.
They have since calmed, but it would still appear that markets see BAE doing better out of the deal (shares flat) than its continental peer whose shares have fallen by 15%. If you believe that the deal has a distance to go yet, and hurdles to clear, the shares could offer significant volatility which can be capitalized upon via the leverage of CFDs and spread betting.
Alyssa Zeisler is a research analyst at Accendo Markets. Tweet her and her colleagues @AccendoMarkets.
Alyssa Zeisler is a research analyst at Accendo Markets. For more about Accendo go to accendomarkets.com
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Thu, 1st Jan - * Next week will get off to a slow start, due to the Spring Bank holiday in the UK and the Memorial Day holiday Stateside, although the macroeconomic data flow will accelerate towards the end of the same, particularly in the US. Nevertheless, local elections in Italy this next Sunday - May 27th - may bear watching.