Two sides go to war over a giant defence tie-up – both must win

Marc Sidwell
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A BATTLE between political and commercial interests is being played out over the proposed merger of BAE and EADS. The captains of industry want to test out their strategic vision by creating the world’s largest defence group; the politicians claim the right to protect their assessment of the national interest whatever the commercial consequences. Unlike more conventional conflicts, though, this is one that both sides need to win.

There is, after all, little point in creating a group massively dependent on Western government contracts if in the process it loses the trust of Western governments. At the same time, there’s little virtue in turning BAE’s current composition into some sort of UK PLC heritage project at the cost of its long-term viability. MPs can’t secure manufacturing jobs in perpetuity simply by ordering the firm not to move them. Best to leave that sort of thing to the current French administration.

In fact, one of the points in favour of the merger is that it could work out limiting the sort of Franco-German interference possible at EADS. Golden share arrangements for the UK, France and Germany would allow all these countries a veto against future acquisitions but in return the new group could significantly reduce more day-to-day involvement, especially in the interests of keeping BAE’s lucrative relationship with the US, which would be likely to suffer from the impression of European governments standing too close to the controls.

But inevitably there will be plenty of political red lines in such a sensitive deal. The current heads of BAE and EADS need to fight for their plan in such a way that none of the politicians feel that they have lost out on matters of national interest even as their influence wanes.

One key test of how this tussle is going could be the date for a firm merger proposal. Under the Takeover Code, 10 October should be the final deadline. But political voices are calling for the normal operation of the rules to be bent. If they win, it may signal a harder fight for both sides to come out on top.