Thus was struck another of the grand bargains that are building the New Europe. Combining a little bit of ambiguity with a couple of compromises and a great deal of potential, the creation of the new European Aeronautic Defense and Space Co. already looks like a classic of the genre. Despite the last-minute scramble, the French government mustered the political will to cut its 47 percent stake in Aerospatiale to 15 percent of the newly created EADS. What happens after that isn’t entirely clear. But in the meantime, the merger–which creates the world’s third largest defense business–accomplishes a number of goals. First on the list: bringing some long-sought clarity to the organization of Airbus Industrie, the four-nation consortium that competes with Boeing in civilian airliners. With Spain’s CASA also about to join the new company, through a proposed acquisition by DASA, EADS will control 80 percent of Airbus. Decision-making at Airbus is about to get faster–and life at Boeing is about to get tougher.
Europe, of course, has been trying to unite its fragmented aerospace industry for much of the decade. The principal players are DASA and British Aerospace, both private companies, and Aerospatiale; the three are also the main partners in Airbus. Both the British and the Germans have feared for their profitability if they combined with a company largely owned by the French government. But Paris has been loath to pull out of a business so central to national pride. In July 1998 with a German-British deal looking like a possibility, the French signaled a slight change of heart by merging Aerospatiale with the private defense company Lagardere. It still wasn’t enough for the Germans, who continued to focus on British Aerospace. Then, shortly after Christmas, BAe abruptly broke off talks with DASA and instead bought Marconi Electronic Systems, the defense unit of Britain’s GEC. Feeling betrayed, DASA CEO Manfred Bischoff started looking for an American partner–only to conclude that U.S. national security rules made such a deal impractical in the near term.
According to industry sources, Schrempp and Bischoff then decided to try to force France’s hand. The French and the Germans have equal 37 percent stakes in Airbus. Last spring, Bischoff launched merger talks with Spain’s CASA–knowing full well that CASA’s 4.6 percent stake in Airbus would tip the balance of power east of the Rhine. Industry sources say Jean-Luc Lagardere called Bischoff as soon as the CASA talks became public. Schrempp and two colleagues met a small team from Aerospatiale before the Paris air show on June 12. But talks ran aground in mid-July. The Germans wanted the French state share in the new company sliced back to just a few percentage points. That was unacceptable to Paris–at least initially. In mid-August, Finance Minister Dominique Strauss-Kahn invited Schrempp to Paris to resume talks.
In the end all those meetings produced a classic–and slightly murky–Euroland compromise. Sources close to the talks say that Schrempp only agreed to leave 15 percent of the company in government hands because he secured what amounts to a put option. If government ownership is not drastically cut over the next three years, he can sell back Daimler’s stake to the French at market value. It’s all agreed, right? Well, maybe. “There is no reason for the state to diminish its share,” a spokesperson for Strauss-Kahn carefully explains. Read between the lines, say some observers. “It was all smoke and mirrors,” advises one French source close to the deal. “Strauss-Kahn’s wish is that the French state move out as quickly as possible.”
Despite the Eurofudge, the new company looks surprisingly transparent in some respects. It will be based in the Netherlands, with a mixed board of insiders and outsiders, rather than the two-tiered supervisory board system. “The Germans insisted on a very pragmatic approach that would be attractive to shareholders,” says Heinz Schulte, Bonn-based defense industry analyst. The new company aims to list 40 percent of the company in Paris, Frankfurt and Amsterdam by early 2001, leaving 30 percent in DASA’s hands and 30 percent to be split among the French partners. Not so pragmatic, though, is the scheme to maintain two sets of headquarters (in Munich and Paris), chairmen (Aerospatiale’s CEO Philippe Camus and DASA’s Bischoff) and CEOs (still being decided).
It’s no surprise that Schrempp was the driving force in this deal. Since running DASA in the early 1990s, he has championed the idea of a single European defense company. And lately he’s had an additional incentive. DaimlerChrysler’s share price has plunged in recent weeks because of disappointing profits and a management overhaul that cost it a well-respected senior executive from Chrysler. Spinning out aerospace could drive the stock back up. The industry tends to have higher valuations than the car business, but at DaimlerChrysler that value was hidden and therefore wasted, notes Nick Cunningham, aerospace analyst for Salomon Smith Barney in London. Schrempp is betting that his 30 percent stake in a highly valued company will boost DaimlerChrysler’s shares.
The deal should be even better news for Airbus. Although the consortium is outpacing Boeing with new orders, it is still an irrational, opaque animal, born of political compromise and maintained without much of an eye on profits. Its work is preallocated, not assigned by tenders: Germany makes the fuselage, France the cockpit, Britain the wings, Spain the tail. Now that three of the four partners can peer into each other’s books, there should be room for streamlining. The deal could even boost the fortunes of the A-3XX, Airbus’s answer to the Boeing 747. Airbus hasn’t yet sent out the sales force to chalk up orders for the jumbo 650-seat plane, but in theory, a leaner company can better hold down costs and offer airlines a better deal.
Where does the deal leave the British? EADS has invited British Aerospace to join in, but there is probably no reason for the company to move yet. It may be better off waiting until the Franco-German group sorts itself out. After all, it’s already collaborating with the French on a clutch of programs: for the moment there’s no need for closer ties. “It’s involved with the projects, but not the management,” notes Clive Forestier-Walker of Charterhouse in London, adding that BAe is roughly twice as profitable as the new creation. Meanwhile, it will be easier, as 20 percent owner of Airbus, to sit down at the table with just one partner instead of three. BAe is near an agreement with Alenia of Italy to pool their defense electronics businesses. It could also look across the Atlantic to do a deal, but as DASA found, that is not likely to be a smooth process.
DASA and Aerospatiale have a lot of hard work ahead of them to actually pull this merger together. For now, though, EADS can bask in the proud gaze of two governments that have a sheaf of documents to wave at those commentators who claimed that Franco-German relations had hit a wall. Not so; they’d hit the runway.
France’s Aérospatiale Matra, partly state-owned, is merging with Germany’s DaimlerChrylser Aerospace, which is smaller, privately owned and more profitable.
DaimlerChrysler Aerospace INCOMING ORDERS, 1998 Commercial aircraft 36% Military aircraft 19 Aero engines 18 Defense 14 Helicopters 5 Satellites 4 Space 4 IN MILLIONS OF EUROS Revenue 8,770 Operating income 623 Aerospatial Matra INCOMING ORDERS, 1998 Aircraft 63% Missile systems 13 Space 11 Helicopters 10 Systems and telcoms 3 IN MILLIONS OF EUROS Revenue 12,293 Operating income 494
