Simon English: City to celebrate with cheap champagne as 'worst deal ever' dies
Thursday 11 October 2012
Outlook The City fund manager – head honcho at one of our biggest institutional investors no less – broke into a huge grin.
Lunch was just being served when I offered the news that the BAE/EADS deal was off.
"That's the best news I've had in months," she said (there's a clue there, if you care). "It was the worst deal ever."
As an investor in both companies on behalf of our pension funds, this entire merger never made sense.
We pour wine, and she explains one of the reasons why.
Investors in EADS were looking for growth, thinking that a forward-looking business could throw off the shackles of its history as a government entity and be innovative; invent new gadgets, explore new markets, move away from its European base.
Investors in BAE were aware that its growth prospects might be limited given the hack-back on UK and US defence spending, but reassured by the chunky dividend it pays and will keep paying.
With bonds yielding nothing or less than nothing after inflation, a high yield stock is a valuable thing; a prize not to be tossed aside lightly. In other words, the owners of the two businesses had entirely different aims.
One was looking for a rising share price, the other for income.
Our equities friend won't be alone in holding shares in both – in different funds, with specifically different approaches, bought by different customers – but the fear was that the combined entity wouldn't deliver on either front. No growth. No innovation. And a tumbling divi while a now colossal, and colossally bureaucratic entity, nudged its way towards failure.
The official line here is that "political deadlock" was the reason for the collapse of the talks. That looks like half the story at best.
Earlier this week Invesco Perpetual, a 13 per cent investor, said it couldn't see the sense in the deal.
That was a rather shocking thing for a major player to say at such a late stage and rather suggests the banking advisers hadn't bothered to persuade Perpetual's Neil Woodford of the merits of the case (that's somewhere between foolish and negligent).
Ian King, boss of BAE, says he is "obviously disappointed" an agreement couldn't be reached with "our various government stakeholders". It seems fairly clear that the private stakeholders thought the whole plan stunk too.
This is the sort of failure over which heads should clearly roll.
The banking advisers in particular might be thinking of preparing their excuses and surrendering any fees that might be payable.
For the record, they are: Perella Weinberg, BNP Paribas, Evercore Partners and Lazard for EADS, and Gleacher Shacklock, Morgan Stanley and Goldman Sachs for BAE.
The City normally cheers big merger deals for predictable reasons (money). This time even the Square Mile looked at the proposal and went: come again?
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