The question on many people's lips is whether EADS can create a new business model for aerospace and defence which works, combining government interest, investors and industry, or whether current investor jitters will become a self-fulfilling prophecy.
Despite consolidation, the aerospace sector has not performed on the world's ex-changes in the way that many hoped. Perhaps, therefore, EADS' potential investors should be concentrating on the commitment to programmes and looking towards medium and long-term performance potential for strong profit cycles and a policy of dividends, rather than short-term capital gains.
Last week, EADS bosses said that for the initial public offering (IPO) to be successful, three tasks are necessary: integrate the three companies and increase profitability; invest for growth and continue the process of industrial consolidation.
They claim there is a new management structure which does not double up on functions but reflects multinational teams working together. They have drawn up a business plan and cleared the merger through the European Commission's competition authorities.
In addition, the companies have worked closely together for years. Furthermore, the continued integration of the industry, including other links with Alenia, Embraer, Lockheed Martin and Northrop Grumman, points to an outward-facing approach rather than a concentration on nationally driven goals.
The political support is now coming in spades. There is definitely the political will to provide launch aid for the A3XX, even though the Airbus partners have yet to agree how to structure the consortium for the future. Europe's leaders have also nearly agreed on harmonised export controls to assist in defence sales to underpin profitability as well as meet the politicians' concerns to sustain employment.
There are also other programmes, with production ramping up, that will be the foundation stone for EADS for growth and profitability.
So why should the investment community be nervous? One question is how EADS will benefit from the traditional merger efficiencies when the group has ruled out significant job losses or plant closures. The company's management insists such measures are not the key to driving cost savings and growing profits, particularly when the orderbook is strong.
The key in high-tech industries, it says, is expanding the business, improving research and development focus, creating centres of excellence and streamlining the supplier base. The management also insists that there is little duplication across member companies and those groups with which it intends further integration. EADS is projecting that at least one half of the €500million ($470 million) savings year-on-year will come from Airbus once the integrated company is created. But such a saving is little more than 2% of the total €22 billion annual revenues.
The reason for the jitters is because the financial community does not like uncertainty, be it over the future shape of Airbus, a crucial element of EADS, or the impact of the government shareholdings after the flotation.
Also, the decision to postpone the supervisory board meeting to formally launch the A3XX commercially will knock investor confidence in the run-up to the 10 July IPO. While politics and industry are a vital combination for big ticket projects, the tie-up can also obfuscate seemingly ordinary business decisions. If privately owned and run newly merged groups such as Boeing, Lockheed Martin and Raytheon have had serious problems, adding the complication of continued state holdings could be a recipe for disaster. However, within the context of Europe, state backing could be a vital ingredient for success. It is the degree and nature of political interference which is the crucial issue.
EADS is adamant that it has the right ingredients to achieve its goal to be the world's second biggest aerospace and defence group. It is too early to pass judgement. But perhaps it should be up to the investor community to reassess the way it evaluates these new high technology groupings as they take shape.
Source: Flight International
