Thursday, September 13, 2012

BAE Should Put the Brakes on EADS Merger

It seems hard to believe that the management of BAE, based on their recent presentations and strategic focus, would contemplate a merger with the parent of Airbus, EADS.  BAE is gaining traction in areas of great interest worldwide, namely defense services,  round the clock, electronic surveillance and intelligence, as well as commercial security.  They recognize that the defense hardware budget cycles are moving against them, but the market for services that support continuous monitoring and electronic warfare should be robust across all regions. 

The market for commercial aviation has seen an order spike around the delivery of the next generation of jumboliners.  This is now history.  Manufacturing and delivering these behemoths won't be easy.  The market will likely change to smaller, more fuel-efficient aircraft after the jumboliners are in service for a few years. Who needs this kind of long cycle, politically order-driven business? Boeing is a fine company, competing with the EU subsidized EADS. Boeing is not troubled by this proposed merger. That's not a good sign.

Merging these two companies and their distinctive selling cycles will be an absolute nightmare.  Customers will be very nervous about their future support. As Raytheon has crowed, it will mean contract gains for their sales teams during the integration cycle. 

At the end of the day, BAE shareholders will own only forty percent of the combined company.  Some better valuation work needs to be done by the BAE bankers.  It seems like I've just begun to see BAE appearing on institutional ownership lists.  10 analysts have BAE as Buy or Strong Buy, with 12 Holds, pre merger. Post-merger, newer shareholders may move on to greener pastures. Too bad.

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