Germany blocked the proposed €35bn (£25bn) merger between BAE Systems and EADS after deciding that the UK and France were getting too great a share of benefits from the deal – and Berlin was getting too little.
According to sources close to the transaction the position of the German chancellor, Angela Merkel, hardened in the 24 hours leading up to Wednesday's decision to abandon the deal, even though Paris and London had come close to a consensus that would have allowed both companies to continue with merger discussions.
Merkel's opposition shocked all parties, coming as optimism grew that a deal could be struck. EADS said: "No firm reason has been given for the German government's opposition."
A source close to the talks said that with three days to go before the Takeover Panel's put-up-or-shut-up deadline, BAE and EADS were 90% certain that enough progress had been made to seek an extension to the deadline which would have allowed negotiations to continue. However, Merkel balked at a perceived lack of German influence in the industrial behemoth that would be created by the combination of Britain's largest defence contractor and the Franco-German owner of Airbus.
One of the key sticking points was the plan to establish the head office of the new company at the Airbus base in Toulouse and site the defence headquarters of the company in the UK. A demand that the corporate HQ be located in Munich was lodged by Merkel's adviser in intergovernmental talks on Friday.
"It became clear that the German government position was not supportive," said the source. "Partly, that was because the defence business was going to be based in the UK and the overall headquarters would be at Airbus in France. The German government was left saying 'what is in it for me?'"
Appointing a German national – EADS chief executive Tom Enders – as boss of the new company did not assuage deeper concerns about the 50,000 EADS employees in Germany. "In the longer term there was a concern about industrial, hi-tech jobs going out of Germany, and the level of influence of that Germany would have had."
BAE's chairman, Dick Olver, told the Guardian that the politics factor had always made the chances of success no greater 50/50. But, he said, the prize of creating a manufacturing powerhouse with 220,000 employees, spanning tanks to airliners, made it a gamble worth taking. "The upside was worth the risk," he said.
In the end the politics proved insurmountable. Concerns over government influence centred on the size of French and German state shareholdings in the new business. France and Germany control 22.35% each of EADS through direct and indirect shareholdings and Merkel was concerned that this power would be eroded by the deal.
The UK government, in turn, owns a golden share in BAE that allowed it to limit foreign investment in the business. France's state holding company would have emerged with a 9% shareholding in the new business – the same as Germany's – but the Merkel government was concerned that the French state might increase its stake by acquiring the 7.5% shareholding in EADS owned by French media and retail conglomerate Lagardère.
With 24 hours to go before the deadline to reveal the details of the deal, France and the UK were close to reaching agreement, but Germany remained opposed. "Over the last 24 hours it seemed like the British and French government had got to a good place," and there were hopes that Berlin could then be persuaded to ask the Takeover Panel for an extension to its deadline of 5pm. Instead, said the person familiar with the talks, "it became a case of having the French and British on one page and the Germans on a second page." The plug had to be pulled.
In France, the finger was also being pointed at Berlin. A source close to the negotiations told French journalists: "It didn't work because the Germans blocked it."
Merkel's opposition, however, had not emerged suddenly. In a bid to keep the merger talks top-secret, BAE and EADS and their advisers had briefed the UK, French and German governments at the highest levels when they opened discussions in July. Merkel was involved from the start. A source close to EADS said the talks had been showing substantial progress, which left both sides "surprised" at the final outcome. "Common sense was breaking out all over the place," said the source, referring to the rising hopes of a talks extension in recent days. "But we just did not get German consent. And we still don't know why."
A German government spokesman brushed off attempts to blame Germany for the collapse of the deal. He said the aerospace and defence group would not be affected by the merger collapse and stressed that both companies could continue to co-operate as before, including their partnership in the Typhoon eurofighter project.
"The government supports the already existent co-operation of both companies and has complete trust in the business leadership of EADS," Seibert said. Peter Hintze the government's co-ordinator for aerospace who has long voiced his opposition to a merger, told Spiegel Online: "The strength of the companies lies precisely in the close cooperation between the Germans and the French."
