News of a possible €38-billion tie-up between EADS and BAE Systems came out of a clear blue sky on Wednesday. The suddenness and speed with which word leaked out took the companies by surprise, leaving both sounding less than persuasive about how and why the deal might be done. Their comments bore a whiff of fantasy M&A.
Europe's biggest aerospace company and largest defence contractor have now given themselves almost a month to put wings on the fuselage. In the meantime, one test of whether a combined entity might fly is to see if it is possible to construct a plausible team for the flight deck.
The expectation is that each company would maintain its separate listing – EADS in the Netherlands and BAE in the U.K. – while sharing a board. So far as the board alone goes, this would surely be less of a challenge than EADS's original management chain, which involved two chairmen and two chief executives (one French and one German). And other Anglo-Dutch groups such as Unilever and Reed Elsevier appear to manage this set-up.
But the question is how far EADS-BAE would be one or two companies. At Unilever, for example, it is barely possible to see the join between the NV and the plc. But part of the case for a dual-listed aerospace and defence giant is that each element could assure defence customers that the most sensitive parts of the business could be kept separate. So the companies need to explain how this ring-fencing would work within a common board structure.
Tom Enders, the German boss of EADS, looks the most likely chief executive. After all, he would hardly have put the effort into the extensive discussions needed to get even this far without intending that he would be in charge of a combination he first eyed back in 1998 when he was at Dasa, the aerospace business of Daimler.
Filling the chairman's slot is more problematic. In a straightforward deal, the junior partner that misses out on providing the CEO would typically provide the chairman. But if this role went to, say, Ian King of BAE, what scope would there be for a French representative at the helm?
With Gallic sensitivities already inflamed, the idea that Paris would not have a voice as one of the top two could be a deal-breaker. But since Lagardère so famously wishes to quit EADS to focus on its media empire, current EADS chairman Arnaud Lagardère is scarcely the best candidate. Moreover, though London may mock the desire of Paris to have its representatives in charge, imagine the reaction in Westminster if there were no room for a BAE person at the top. Three into two won't go.
The rules for appointing EADS directors underline what a nightmare it has been to balance national interests so finely. Agreeing board composition on the basis of a straight 50-50 split between board members from EADS and from BAE should be simpler.
But the concept in U.K. corporate governance of independent non-executive directors might be harder to accommodate. The corporate code says that more than half the non-executives (excluding the chairman) must be independent, and is quite hardline as to what counts as too close a link with the company.
Of course, a company can explain why it has not stuck to the provisions. But an explanation along the lines of "Well, it's still really important to us to have the views of the French state right here in the boardroom" may lack broad appeal.
And yet this might – unfortunately – reflect the true position. With the dissolving of the shareholdings through which Paris and Berlin have so damagingly wielded influence on EADS, the three governments of the U.K., France and Germany would each have a "golden share" in the combined group.
Allowing governments to block decisions by EADS-BAE that might harm their national interests is merely the minimum needed to stand a chance of achieving the political approvals the deal would require. It is fair enough, too, so far as issues of defence are concerned.
The danger is that the governments will not confine themselves to military questions, but will instead want their way over other aspects of the group, notably Airbus,which accounts for the lion's share of revenues at EADS. Political pressure to keep open factories and preserve jobs, instead of allowing the group to switch production to the most commercially advantageous locations, is part of what has held back EADS.
If an EADS-BAE combination is to be an effective challenge to the might of Boeing, ministers must let it make decisions based on industrial, corporate and strategic logic, while allowing each other some leeway in the populist rhetoric needed to cover this change of tack.
There is little sign of that mood in the governmental responses to news of the possible tie-up. Up in the air dealmaking now looks set to crash into political realities.