Margareta Pagano: Merkel's heart forced the 'nein' on BAE merger

The German Chancellor's veto of the EADS deal has left both companies' bosses and investors with questions to answer on their future strategy

By all accounts, Angela Merkel, Germany's Chancellor, only made up her mind to block the merger between EADS and BAE during her call to France's President, François Hollande, late on Tuesday night.

Ms Merkel made the call while in Athens to meet Greek ministers. It can't have been an easy trip for her: the sight of the 6,000 armed police guard and burning Swastikas must have been nasty reminders of her country's past. Some say the experience proved the tipping point in her decision that Germany simply couldn't stomach being a shareholder in what would have become the world's biggest defence-to-aerospace manufacturer.

Ms Merkel is clearly a woman with an almost theological clarity in her beliefs and as well as an eye for the opinion polls; it's only two years since she stopped Germany's nuclear programme after she saw how the public mood was changing with its nein danke atomkraft campaign.

So it fits her personality that this deep-rooted fear of becoming involved in defence or taking military positions – remember Iraq and Libya – was the final straw, whatever the industrial logic of the deal.

What happens now? Is Tom Enders, the EADS boss, who is being criticised for not having had a more sophisticated feel for the German political mood, for the chop? Will both the bosses of BAE, chief executive Ian King, and chairman Dick Olver, have to fall on their swords? And, perhaps most pertinently of all, is BAE now in play?

First, the EADS board is backing Enders to the hilt. From what one hears, investors feel the same although there is some relief that EADS is not paying a premium for the merger as the shares have jumped. But the big question at EADS is where it goes next; some say it will at least try again to nibble away at the US defence market.

At BAE, the position is less clear. When such a deal doesn't even get to first post, there's always a back-lash against the management. BAE's argument for the merger was that by diversifying away from defence and into civil aerospace, it would get ground cover against the falling US and UK defence budgets. So what does it do instead?

Understandably, Olver and King are devastated that the deal didn't get off the ground and say BAE will continue with the current strategy of expanding into areas such as cyber intelligence and building on the non-US and UK markets which already provide 30 per cent of sales. Indeed, there are orders coming in from the Gulf. They will also look for bolt-on acquisitions.

Will that satisfy investors? A strong dividend policy is likely to keep them sweet for now. But if they do demand heads, it will be for past performance and not for this deal – one of the best hands BAE has tried to play for years.

Never say never, but it's unlikely that BAE is in play. Too many of the potential predators – Boeing or Lockheed – would encounter huge competition issues at home. The Pentagon would never allow it; nor would the UK government. It may have liked this deal but it's unlikely either a US or Chinese company would see the light of day. Joining up with a UK company, such as Rolls-Royce, also looks unlikely because of conflicts over current contracts.

What is sure is that EADS and BAE will continue to work together, even more so, according to King. It's not without irony that Germany is already deeply embedded in defence: the joint £20bn Eurofighter project is a consortium between EADS and BAE, Italy and Spain, and is on the cusp of a big export drive.

What is fascinating about the affair is how so often the political boils down to the personal.

Keep an eye on minister Fallon, he's on the way up

Michael Fallon has only been the Business and Enterprise minister for a month but he's taking to his new role like a duck to water.

He certainly gets my vote for the best turn at the Conservative Party conference where he hosted a "chat-show" debate with some heavy-weights from the business world.

Usually these fake US-style conference sessions are cringe-making in the extreme. But Mr Fallon really got stuck in, asking some proper questions of his guests – Mark Price of Waitrose, Steve Holliday of National Grid and Paul Drechsler of Wates – on what the Government should be doing to help business, and vice versa; both need to do more was the answer.

It made a pleasant change from the typical political love-in.

Mr Fallon then told the story of how Germany's defence minister Thomas de Maizière turned to him at a meeting of European defence heads a couple of weeks ago and complained about how the opening of Berlin's new blockbuster airport at Schonenberg has been delayed and is at least a ¤1bn (£623m) over budget.

"Could he [Mr Fallon] please send over the man who delivered the Olympics on time and on budget," asked Mr de Maizière.

How the Tory faithful in the audience laughed; how they cried. You've got to admit it was a good line.

For an encore he then introduced the hero of the night himself, Paul Deighton, the Olympian midwife, and who luckily is now in charge of the UK's infrastructure projects so we might see some more action.

Watch out for Mr Fallon; he's got form.

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