Beverly Hills, CA, – Jason Galanis has always tried to take a top down approach to investing because I believe the macro picture can change everything. That does not mean I do not believe in bottom up analysis; a company run well can survive in any weather. Is that true of relationships as well? In particular the supposed “special” relationship enjoyed between the United States and the UK. I believe there is a macro economic event playing out right now that may give us the clue.
The merger between EADS and BAE is not a typical merger for many reasons. For one both the French and German state hold shares in EADS. Second, BAE holds a special security arrangement with the United States, which has blossomed quite profitably in the recent expeditionary presidency of George W. Bush to $14 billion in revenues and employment of some 40,000 people in 40 states.
But, as we all know, all good things come to an end. With a war weary American public and a more laid back policy on foreign intervention (notice the back seat on Libya and the non action on Syria) BAE is not doing the kind of business it was during the Bush years. Couple that with a weakening of the financial sector-the UKs biggest industry- and European woes in general and it is not surprising that BAE would like a partner.
But does the threesome make any sense? It was argued recently that even the Franco German pairing made little sense. New products were late to market many times and factories made parts in disparate sections of the company that ultimately did not work together causing delays. The EADS CEO former German paratrooper, Tom Enders, says it is a perfect fit. Shareholder who perhaps disagreed with the CEOs position let the market know with a 12% dip in the EADS share price.
However when you are talking mergers and acquisitions this is par for the course. There is a reason information close to such deals is valuable and there is a whole hedge fund industry that makes money going long the acquiree and short the acqiuerer. However, there are those on the BAE side that say this is exactly the wrong time for a merger as the company is just starting to come out of its funk from slumping American security spending.
Is this simply posturing? Possibly yes. Each side is going to make the strongest case it can for its own interests. However, anyone in the business knows that there is no such thing as a merger of equals. And in this case BAE stands to become junior partner with 40% of the new company with 60% to the new owner. And this is where things get a bit messy. The security arrangement BAE has with America will not continue into a junior partnership with a Franco-German company.
And this is the sum of the story: a United Kingdom forced to chose between Atlanticism and further integration into the faltering union they already hold one foot out of. In a way, the British have a very privledged place in the world; coveted by both America and Europe yet coy with both. And the decision by America and the reaction by the Brits may determine where this relationship is going.
So I can here the next question; where is the punt? And that is the real trick. Rarely are things in life binary. When I touched down in Macao 10 years ago I saw it right away. A gambling hungry populace of billions of people served by a single enclave; where could things go wrong. But when you mix politics into investment the answer is almost anywhere anytime.
Do I think the merger will go forward; yes I do. Am I long on it? This to me is a microcosm of the Euro experiment; a move towards not just saving the Eurozone but enhancing it as well. And I answered this question when writing previously about the euro currency; my money is in Asia, in fact, it has been since that trip to Macao. But it does not mean I am not intrigued by this tipping point event that currently has the world in its grip. We will see how it plays out.