Followup on BAE - EASD Merger...

...which appears won't be happening.

Per the Financial Times:

Government officials in London, Paris and Berlin blamed each other for not backing the €36bn tie-up between BAE Systems, the UK’s defence champion, and EADS, Europe’s biggest civil aerospace group, while investors accused BAE of having a muddled strategy that threatened shareholder value. 

An opinion piece in the Economist blames it on Germany (EADS ownership is complex; a large portion is controlled by Daimler).  And, the BBC has a very nice summary of the whole deal.

Back to Black?

In both 320 sections, we've recently been talking about bribery, with some reference to the 2003-2006 scandal involving BAE Systems (British Aerospace Engineering) and Saudi Arabia, with a supporting cast of a large flock of fighter jets, a pink airplane, a peacock-blue Rolls-Royce, and numerous sports cars.

Although there was some speculation that BAE chairman Sir Dick Evans and his high degree of cross-cultural awareness played a part in securing the Saudi contract.

Well, BAE is in the news again.  There's a proposed merger between BAE and EADS (European Aeronautic Defence and Space Company).  Per the Financial Times:

Both companies are aiming to reach an agreement by October 10, according to two people familiar with the deal talks. BAE and EADS executives wanted to decide “whether this thing will fly or not” by that date, although the deadline could be pushed back if necessary, one of these people said.

Some Background

Both companies are defence contractors (that is, weapons manufacturers), although only about a third of EADS revenues are military (EADS includes Airbus, which is civilian aircraft).

The Economist quick update on the arms business

EADS is a Dutch company, with a complex ownership structure that includes the German, French and Spanish governments and Daimler and worldwide operations (including China and Brazil). 

BAE is British owned and  deals primarily with the UK and other English-speaking countries (US and Australia), with significant interests in India and Saudi Arabia.

The Merger

According, again, to the Financial Times, the motivation behind this is mutual benefit.  BAE has a significant presence in the US defence market (which is almost half of the world's defence spending), allowing the EADS / BAE combination to take on Boeing.  And, if military markets dry up (though plans would be to expand into additional lines of military hardware), EADS has Airbus, which is civilian aircraft.

However, nobody else -- shareholders, governments, employees, labor unions, and the lady that pushes the food trolley on the Hogwarts Express -- likes the idea.

More later....

The US Reaction

Here's the New York Times coverage; from the comments, it appears that US observers are worried about the potential power and size of the mergerd firm.

NYSE Euronext merger with Deutsche Boerse blocked by EU (BBC News)

This is a very appropriate news item, for us at least. On the agenda for tomorrow (Friday) is a discussion of economic and legal systems.

Today's business climate is one of mergers and acquisitions, though those mergers don't always meet with the approval of governments interested in enforcing antitrust laws (see here for a brief refresher on antitrust).

In class, we'll take a look at Microsoft and their troubles in the EU.

The BBC article deals with a proposed merger that's been going on for a while now. Like a lot of these, it goes beyond the merely complex.

NYSE Euronext is a merger (dating back to 2007 or so) of the New York Stock Exchange and Euronext, which was itself a merger of a number of European exchanges (not, however, including either London or Frankfort).

At one point, Deutsche Börse (Germany, based in Frankfort) wanted to buy Euronext, but was beaten out by the NYSE.

So, in early 2011, Deutsche Börse decided that they were going to acquire NYSE Euronext. At the time, the expectation was that the merger would happen fairly quickly. Per a Wall Street Journal article from a year ago:

A deal could be announced as early as next week, according to people familiar with the situation, though a host of regulatory challenges await on both sides of the Atlantic, according to competition experts.

Well, the deal isn't going to go through. The European Commission announced yesterday that the merger would violate EU antitrust provisions.

But, the US didn't have a problem with the merger, approving it in December of 2011.

The difference between the EU and the US is that EU regulators appear to be somewhat more aggressive in their enforcement of antitrust. For example:

The day after blocking the merger of NYSE Euronext (NYX) and Deutsche Boerse AG (DB1), the European Union’s antitrust chief vowed to veto other deals that hamper competition. The EU will continue to block deals “whenever necessary,”
Joaquin Almunia said in prepared remarks for a speech in Brussels today.

So, what does this all mean? There will most likely be additional consolidations in the world's markets; the London Metal Exchange is looking to be bought out soon. It does mean that, as a company looking to raise money in the equities market, that there'll be less choice as to where to list one's stock. Does that matter? In reading through the EU's press release on the NYSE Euronext / Deutsche Börse merger, they keep saying "competition is good," but it's not clear just why competition among financial marketplaces is a good thing.

Ok. Having nothing else to do, I decided to see if I could find out why. What I found was a very long and complex paper written by academic economists in 1998. I ran out of steam on about page 6 (out of 50), but if I'm reading this right, there's no good economic reason for a lot of competition. Also, prior to a single European currency and increased cross-border ownership of securtities, most world exchanges were already monopolies within their countries:

The presence of many exchanges in reality is not incompatible with this view, as exchanges were not competing with one another, at least in Europe, until a decade ago, due to different regulations and currencies that let them be monopolist in their relevant markets. In fact, in each country, either only one exchange existed or only one was dominant and absorbed the small regional ones (as in France, Italy, Spain, and Germany).

Today's story has been widely reported, but the more I think about it, the impact on businesses in general will most likely be a limited one. It's still an interesting story, especially when you look at the history behind it.

Carrefour to Enter India (edited to add stuff)

Carrefour is looking to enter the Indian market:

Moneycontrol India :: News :: Carrefour to enter India soon :: :: Business :: Carrefour,Kamal Nath,Wadia,Britannia,Danone,WalMart,Bharti

This may be the deciding point for WalMart -- can they really make it in the international market. Of course, it's not only Carrefour they have to worry about; British chain Tesco is also planning on entering the Indian market.

Here's a big problem, though, for all of the Western chains. India has several big retail chains already. Also, distribution channels in India are nor the same. There seems to be much more reliance on smaller neighborhood / village stores and street vendors, something which the Indian chains seem to be able to accomodate. And, Indian conglomerate Reliance Industries Limited has no plans to roll over and play dead !

A second issue, and one that could keep all of these companies out, is the legal / political climate. Basically, India isn't very welcoming to foreign direct investment, despite 15 years of efforts by some (but not all) Indian political groups to make foreign investors welcome. Walmart isn't giving up, though, and they may be able to bring political pressure to bear from the US government.

Added:

Lejoyi has an interesting angle here.....(as well as an extra credit point)

As we talked about with culture, there definitely does seem to be an Islamic backlash against what's perceived as the encroachment of Western secular values -- Mecca Cola, the Islamic Barbie, and any number of retailers of modest clothing styled for Western sensibilities.

And as for WalMart [and we'll talk more about this when we get to marketing], they just don't seem to have really "gotten it" when they've gone international. Especially in Germany, it was failing to understand cultural differences that sunk them.

Out of curiosity, I googled WalMart and a handful of major Islamic countries. I did come up with a recent rumor that WalMart is planning on entering Malaysia. They're also beginning to establish ties with a lot of Turkish manufacturing firms. I'd think that Turkey would be a good place for Walmart to expand their retail presence, a thought I found some confirmation for (though Carrefour has been in Turkey since 1993, with 539 stores, so maybe it isn't such a good idea...).

As for India.....

While there is a significant Muslim minority in India (13.4%), it's going to be Hindu values and Indian customs that WalMart will have trouble with. For an example of a Western company having some success in India, see McDonald's, oddly enough.