This Ain't About the Free Market

The news that BAE and EADS are in merger discussions has very little to do with the market or market efficiencies.

It's about EADS purchasing an entry in the the US market, one which BAE purchased when it bought United Defense,  Tracor,  LMCS, LMAES, etc.

Ironically, BAE sold its 20% share in EADS about 6 years ago.

The reality is that the defense market is essentially a monopsony, with governments in general, and the US government in particular serving as a single buyer, though with this merger the other end of the dynamic is heading more towards monopoly as well.

Thus, I find the protestations by BAE management that the French and German governments must not have the ability to exert realistic shareholder rights, together they own about 45% of EADS, to ring a bit hollow:

BAE Systems has insisted it will walk away from talks with EADS unless the combined European champion in aerospace and defence was allowed to operate as a normal company without political interference.

BAE is also insisting that the combined entity’s defence business would have to be based in the UK if the plan, news of which was leaked on Wednesday before the structure was finalised, is to go ahead.

Gee, a defense contractor must be kept free of political influence?

This deal is all about creating an entity that can manipulate the politics to its own advantage.

The insistence that the French and German governments sell out, if they didn't they would have about a 27% stake in the merged firm, is all about the company being able to whipsaw governments with  promises, or threats, about defense jobs.