EADS and BAE Systems called off the world's largest defence and aviation merger on Wednesday, and pinned the blame on Germany for wrecking the $45 billion deal.
BAE said it had become clear that the interests of the French, British and German governments could not be reconciled with each other or with the objectives that BAE and EADS established for the merger.
BAE is a private British company, and its biggest customer is the U.S. military, accounting for nearly half its revenue. EADS, the Franco-German maker of Airbus planes, has a more complicated share structure, giving large influence to German and French industrial groups and the French state.
The merger hinged on the role of both the French and German governments in the combined firm. In the end, it was Berlin, rather than Paris, that proved the problem.
When asked if he had encountered more problems with the German than the French government, BAE CEO Ian King said: "That would be an accurate representation."
EADS said it was still not clear why Germany had objected.
NATIONAL SECURITY
Securing such an enormous and complicated cross-border deal in a sector where commercial considerations are typically trumped by political, economic and national security concerns was always going to be desperately difficult.
"It is, of course, a pity we didn't succeed, but I'm glad we tried. I'm sure there will be other challenges we'll tackle together in the future," said Tom Enders, EADS chief executive.
The companies had until 1600 GMT on Wednesday to declare their intentions and either scrap the merger, ask British regulators for more time or finalise their plans to create a group employing nearly a quarter of a million people that could better compete with U.S. rival Boeing.
A source close to the talks said the companies had accommodated all of Berlin's requests and were baffled as to why Chancellor Angela Merkel's government blocked the deal anyway.
"Germany blocked the deal, although all demands from the German side were met," the source said. "Top German negotiator Lars-Hendrik Roeller was the one who formulated all demands and said no in the end."
Sources said Germany had wanted parity with France in the shareholding of the new group, plus the basing of some company headquarters in the German city of Munich.
"France and the UK agreed that Germany have the same stakeholding as France in the merged group. Separately, vast guarantees were given regarding safeguarding national security interests, sites, jobs. The topic of headquarters was being discussed very emotionally, but not an issue big enough to let the deal fail," a source close to the transaction said.
French President Francois Hollande said the decision to end merger talks lay with the companies, and his government's intervention was limited to stating its conditions.
Britain has largely supported BAE's case that French and German influence would have to be reduced to make the deal work, especially given BAE's vast U.S. business.
BAE SHARES DOWN, EADS UP
At 1450 GMT BAE shares were down 1.14% at 321.7 pence in London, while EADS shares were up 4.44% at 27.270 euros in Paris.
The merger had faced growing unease from investors in both companies who complained they were lacking information. Many people had bought shares in EADS on the strength of its growing Airbus civil unit, rather than its defence ambitions, while BAE investors were attracted by its dividend yield.
"While BAE's long-term prospects could still be quite excellent, the failed merger will leave the firm much more exposed to uncertain factors beyond its control, such as major declines in the U.S. defence budget and potential losses in an increasingly competitive international defence market," said David Reeths, director of consulting at defence analyst IHS Jane's.
BAE CEO King and Chairman Dick Olver said after the merger talks ended that the company's dividend policy would continue and that it was not looking for a tie-up with another company. They also said management would be staying in place.
The British government holds a golden share in BAE that allows it to block foreign takeovers.
Germany does not currently have a direct stake in EADS, but is represented by industrial ally Daimler AG, which holds just over 22%. France holds an identical stake, split between the state and French publisher Lagardere. Daimler said it still aims to reduce its EADS stake this year despite the failed merger talks.
Adding to the hurdles facing the deal, BAE's largest shareholder, fund manager Invesco Perpetual, with 13.3%, had said it was not convinced of the strategic rationale for the combination.
A source with the Spanish government, which holds a 5.5% share in EADS, said: "In the short term this guarantees Spain's stake in EADS from being diluted, but of course a big long-term opportunity has been lost."
