BAE, EADS call off $45B merger

BAE Systems and EADS broke off talks on their $45 billion merger Wednesday that would have created the world’s largest defense and aerospace firm.

The European companies said the German, French and British governments, which all have stakes in the companies, had been unable to reach an agreement.

Sources familiar with the negotiations said that Germany played the biggest role in the deal’s demise, as the German government would not give ground on the ownership stake it would have in the combined company.

France has a direct and Germany an indirect stake in EADS, and Britain has a “golden share” in BAE, which gives it veto power over foreign mergers.

“It has become clear that the interests of the parties' government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger,” BAE and EADS said in a statement announcing the talks had terminated.

Sources said that the French and British governments were comfortable with the way the companies would have structured government control of the combined entity, but Germany was not.

“It was clear they weren’t going to give ground on their stake relative to other nations’ stakes,” said one source familiar with the talks. “It just didn’t provide the room that they needed to make it happen.”

The companies had faced a Wednesday deadline to reach an agreement, although they could have asked for an extension to continue negotiating.

The merger would have created a European company to compete with U.S. defense giants Lockheed Martin and Boeing around the world. EADS is the parent company of Airbus, a chief competitor of Boeing.

While the United States did not play a direct role in the merger talks, the discussions between the European governments were held with an eye toward maintaining access to the U.S. defense market.

Both companies have separate U.S. entities, but EADS has a much smaller presence in the U.S. defense market than BAE.

And BAE has a special agreement in the U.S. giving it access to sensitive defense projects that no other foreign company has.

There were concerns that French and German government would have too great a role in the merged company, and that the Pentagon would not have allowed BAE to maintain its special security arrangement. Both the Defense and Justice Departments would have had to sign off on the deal.

One source said that Pentagon officials had been open to looking at the merger and finding a way to fence off the U.S. entity to maintain the security agreement, which would have been required for the merger to proceed.

Nearing end of day trading in Europe, BAE Systems was down 0.9 percent in London, while EADS was up 4.7 percent in Paris.

This story was posted at 9:26 a.m. and updated at 11:17 a.m.