13 September 2012

Is bigger always better?

How big should a company be?  Is there a stage when economies of scale cease to deliver benefits?  And where governments are involved in defence-related companies, is there any real sense of competition?

The Guardian reports:

BAE Systems, Britain's largest manufacturing employer, and EADS, the owner of Airbus, have announced plans for a $48bn (£29.8bn) merger. The deal creates the world's largest defence, security and aerospace group, while giving France and Germany an interest in the UK's main defence contractor.
The new business would generate annual revenues of £60bn and employ 220,000 people worldwide, including 48,000 in the UK, producing a staggering array of state-of-the-art civil and defence equipment under one roof, from Britain's nuclear submarine fleet to the A380 superjumbo.
Under the terms of the British government's golden share – worth a symbolic £1 – BAE must have a British chief executive and a majority of its board members must be British, while non-UK shareholders can own no more than 15% of the business.
EADS is 22.35% owned by a combination of the French state and the French conglomerate Lagardère, while German carmaker Daimler controls a further 22.35% – part of which is being bought by a German state-owned bank. The Spanish state also owns 5.45% of EADS, which was formed by the combination of Daimler's aerospace unit with France's Aerospatiale Matra and Construcciones Aeronáuticas of Spain. The companies are not corporate strangers to each other – BAE owned 20% of EADS's largest business, Airbus, until 2006.

I am not saying that this is a bad idea but if I were a shareholder in either company (which I'm not) I would like to see the economic rationale for such a merger.

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