I first learnt about the merger talks between EADS and BAE Systems via a tweet from my brother:
I then suggested that the possible kind of “last supper” might have been the “Defence and Security Co-operation Treaty” signed almost 2 years ago between France and United Kingdom.
Last supper. First, what is that “last supper” my brother was referring to? It refers to a meeting that was called in 1993 by William Perry, then US Deputy Secretary of Defense, in which he explained defence contractors the post-Cold War defense strategy which called for defense industrial base consolidation. In the chart below, you can see the spree of mergers and acquisitions that took place in the following years:
US defence contractors consolidation after “last supper” in 1993.
In Europe at the time there was a similar consolidation trend, which ended in mainly 3 big European aerospace and defence groups: EADS, BAE Systems and Finmeccanica.
Setting the record straight. Prior to the definition of those 3 groups, several discussions took place at the end of the 90s between different companies. Some articles that I have read about the EADS and BAE talks mention that after conversations between German DASA and British Aerospace failed in 1998 (when BA opted for acquiring GEC Marconi), DASA underwent the acquisition of the Spanish Construcciones Aeronáuticas SA (CASA). Well, this is not true. It never happened. DASA merged with French Aerospatiale. Some months later CASA joined the merged when EADS was created. This is well reflected in many other articles. Just as a side note: Tom Enders, current EADS CEO took a role personally in those conversations between DASA and BA already in 1998.
Balance between Defence and Civil business. Most of the articles that we can read today mention the strategic goal of EADS in balancing its defence portfolio with the civil one. Two years ago I wrote a post which included some graphics comparing the then largest world defence companies. I compared the relative size of each company and how defence-oriented their businesses are. Today, I will make use of one of those graphics to show the profile of the two companies, EADS and BAE Systems to weigh that strategic fit:
EADS vs BAE. Size and defence profile.
Stock Market response. The merger talks were announced last Wednesday 12th. The closing prices of each company the previous day were:
- EADS: 29.67€. This is, a market value of 24.3bn€.
- BAE Systems: 328pc. This is, a market value of 13.3bn€ (taking that day exchange rate of 1.25).
That is, the combined merger would be 37.6bn€; 64.6% coming from EADS, 35.4% from BAE. However, the announcement mentioned a 60/40 split of the parent company. That is, the announcement pointed investors that either EADS was overvalued (up to +17.7% to get a 60/40 split keeping BAE’s value constant), BAE undervalued (up to -21.5% to get a 60/40 split keeping EADS’ value constant) or somewhere in between.
In the following days, EADS price fell down and then stabilised, BAE went upwards. On Friday they closed at:
- EADS: 25.31€. This is, a market value of 20.7bn€.
- BAE Systems: 347pc. This is, a market value of 14.1bn€.
That is a split of 59.5%/40.5%… thus, the market understood EADS was overvalued around -15% while BAE was undervalued around 6%.
Self praise. Taking that price in which now EADS sells, 25.3€ (undoubtedly guided by the 60/40 split), I wanted to bring back another post I wrote about a year ago. In that post, I mentioned that I valued EADS at a price of 24€… Not bad :-).