EADS NV (EPA:EAD) and BAE Systems plc (LON:BA) have decided this Wednesday to cancel their ongoing talks on a possible $45 billion merger. The failure between the governments of France, Germany, and Britain to reach an agreement over a deal was the main culprit for rotting the merger. The deal, if it had gone through, would have resulted in the world’s largest aerospace and arms group.
Eads and Bae system

In a statement, released by BAE, it said the deal if it had gone through, would have conflicted the interests of the governments with the objectives that BAE and EADS established for the merger. “BAE Systems plc (LON:BA) and EADS NV (EPA:EAD) have therefore decided it is in the best interests of their companies and shareholders to terminate the discussions and to continue to focus on delivering their respective strategies,” it said. The UK government was adamant that its counterparts agree to limit their influence in the merged entity, to ensure BAE’s strong working relations with the US Pentagon. UK Defence Secretary Philip Hammond had been meeting his French and German counterparts in Brussels. The merger needs the approval of the UK, French, and German governments.

The French government has a direct stake in EADS NV (EPA:EAD), while the German government also has an influence through the shareholding of German industrial group, Daimler. The British government is able to veto any deal through its ownership of a “golden share” in BAE Systems plc (LON:BA).

The BBC business editor noted that BAE’s board had made it “an absolute condition for the transaction that the French and German governments should never own more than 9% each of the merged outfits, that they should not vote as a bloc, and that they should not have representatives on the holding company board”.

The main issue that could have caused the collapse of the merge could be an insistent by the UK government and the two company heads that directors appointed by the French, German and UK governments should not sit on the top board of the merged group.

The deal was much more important for UK as it would have saved jobs at two its factories that are owned by EADS NV (EPA:EAD). The move from the aerospace and defense firms, BAE Systems plc (LON:BA) and EADS, came ahead of a 17:00 BST regulatory deadline to close the deal.

The deal would have run into trouble, even if it had received political backing. BAE’s largest shareholder, fund manager Invesco Ltd. (NYSE:IVZ) Perpetual, had already opposed the deal, saying it had “significant reservations” about the proposed merger and “does not understand the strategic logic” of the deal.