BAE-EADS: Angela Merkel blamed for collapse of £28bn merger

The €35bn (£28bn) mega-merger between BAE Systems and EADS collapsed as a result of personal opposition from the German chancellor, Angela Merkel, and despite a series of 11th-hour interventions from Downing Street officials and their counterparts in Paris and Berlin attempting to keep the deal alive.

The proposed combination of Britain's largest defence contractor and the Franco-German owner of Airbus would have created a pan-European manufacturing powerhouse with 220,000 employees, making hi-tech products ranging from nuclear submarines and Typhoon fighter jets to the A380 superjumbo. Sources close to the deal said Merkel had become the most significant obstacle to thrashing out an agreement, with No 10 officials participating in frantic high-level discussions on Tuesday night when it became clear that opposition from Germany was in danger of scuppering the deal.

"It [Merkel's opposition] was a key factor in the decision to terminate the talks," said the source. Another added that Merkel appeared to be "philosophically opposed" to combining a defence business with a civil aerospace company. "The fundamental problem is that Merkel does not feel comfortable with the deal, full stop."

The UK, French and German governments all had the power to veto the deal but Berlin's concern over the potential size of the French shareholding in the combined company, as well as disagreements over the location of the group's headquarters, proved to be the deal breaker that could not be resolved by the last-ditch round of phone diplomacy.

BAE's chief executive, Ian King, said failure to agree the size of French and German shareholdings was the key factor behind abandoning the deal , ahead of a 5pm deadline set by the UK Takeover Panel.

Declining to comment on Merkel's role, he indicated that Paris and Berlin would have to change their stance if the companies ever wanted to attempt a merger in the future. "Unless European governments completely change their current view, we would not be in a position to resurrect the deal."

BAE's chairman, Dick Olver, said the UK government had been "incredibly helpful" and denied that the failure to pull off the deal had now made BAE vulnerable as a takeover target for other overseas buyers – despite speculation that a US defence group such as Boeing or Lockheed Martin could now consider an approach for Britain's largest manufacturing employer.

The defence secretary, Philip Hammond, said the deal "had to be done on the basis it was in Britain's national interest" but the two companies had decided it was "too difficult to progress this project further". A source close to EADS said David Cameron had been "really, really interested" in the merger. "There was a view that the British would be the biggest problem but that did not turn out to be the case."

In a joint statement, the companies said they could not resolve state concerns about the deal, with the UK, French and German governments unable to reach agreement. "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," the statement said.

A person close to the negotiations added that while Germany had proved to be the biggest obstacle, there were still differences to resolve between France and the UK that had not been cleared by Tuesday night's flurry of calls, even if there had been more substantial progress between London and Paris. It is understood that every solution proposed drew an objection from one of the three governments.

France, which controlled 15% of EADS directly, was unhappy with German demands for the business to have its headquarters in Munich, while Germany was concerned that France could end up with a bigger shareholding in the new business than the 9% it was seeking.

The UK, in turn, refused to allow German and French political representatives to sit on the BAE board, as would have been likely under the dual-listed structure envisaged by both companies.

The UK's largest trade union, Unite, said a merger would have "protected the UK's long-term interests" if it had been accompanied by a jobs guarantee for British employees. BAE employs 37,500 people in the UK and is Britain's largest manufacturing employer.

Ian Waddell, a Unite official, said the UK government could secure such a guarantee in future mergers or takeovers by taking an equity stake in BAE. Although the British government has a "golden share" in the business, which can block a foreign takeover, it does not control a significant block of shares similar to France's stake in EADS. When their indirect and direct shareholdings are taken together, France and Germany each control 22.35% of EADS. "It was an unequal negotiation with France and Germany," he said.

Ben Wallace, the Conservative MP for Wyre and Preston, who organised a petition against the deal signed by 45 MPs, said the deal should never have been promoted due to the threat of French and German political interference.

Wallace said the collapse of the merger put the future of BAE boss King, and his board colleagues, at risk. "The BAE board should now reflect long and hard at what their strategic error could mean for the company's future. If they have put at risk my constituents' jobs and fatally wounded the UK's jewel in the manufacturing crown, then they should consider their position."