Markets are punishing EADS for straying off-target. The revelation that EADS and BAE plan to join forces, creating the world's top-selling aerospace and defence company, has vaporized about $4-billion of market value in short order. That is not how mergers are supposed to work. The investor unease complicates a deal that already required plenty of finesse.
Compared to closing prices on Sept. 11, the last date before deal talks leaked, EADS shares are down about 15 percent, while BAE's are up about 3 percent. That equates to a $4.8 billion loss of market value for the Toulouse-based group, and a roughly $530 million gain for its UK counterpart. Overall, about 9 percent of combined market capitalisation has mysteriously gone.
The combined company would be broader-based, less politicised, and heftier: it would overtake Boeing as the sector leader by sales. And while limited business overlap puts a cap on cost savings, they could still be respectable. Annual pre-tax synergies could be 800 million to 850 million euros, according to people familiar with the matter. Taxed and capitalised, that might be worth at least 5.6 billion euros ($9 billion).
But markets are obviously taking a different tack. The reaction does not suggest the deal is off. BAE would take 40 percent of the combined company. Adjust for an expected special dividend to EADS shareholders, and the shares closed on Thursday almost exactly matching that ratio.
Instead, it seems investors are punishing EADS for wrong-footing them, and pricing in a colossal stock overhang that would result from a successful transaction. Hasty leak responses mean key details are still unclear. EADS had produced a roadmap for how it would grow in services, in the United States, and outside of Airbus, by 2020. BAE ticks a lot of these boxes - but represents a sudden shift into the weaker-looking defence business. Shareholders might be starting to apply a "conglomerate discount" rather than according EADS extra points for diversification.
Moreover, the union could see at least some or all of EADS' strategic shareholders in France, Germany and Spain sell out, although the French state will stay put. Together, these investors hold about half the company. Some of those sales might be some way off. But that is a pretty ferocious overhang to clock on the edge of one's radar.