By Dag Potter
Published 4 July 2011
The European aerospace giant, EADS (EADS:P), was formed by combining Airbus and parts of the French and German defense industry. It has joint management and has significant ownership by the governments of those two companies and right now has three main headquarters: two for EADS in the different countries and one for Airbus in the south of France. The company has made impressive growth in the defense sector establishing a U.S. subsidiary and winning some contracts there but still remains primarily European market based.
Because of current European stock ownership rules EADS, a Dutch incorporated company, is looking a making some changes. There are concerns by the two governments and their companies which between them hold almost 45% of EADS stock that they are tying up too much of their capital in the company. European law forbids companies from using their “golden shares” to control non-defense companies. This means that technically EADS, despite its size and valuation, is still vulnerable to a hostile takeover.
One way that all of this could be fixed as well as reducing overhead would be to move Airbus to a separate company, again, and establish the defense arm, Cassadian, as one as well. Airbus remains 80% of the current company’s revenue and earnings. Headquarters could be reduced by at least one as most of EADS would move to Airbus’ reducing overhead and costs. It also would mean that France and Germany could reduce their stock holdings of Airbus and reduce their total capital investment in what would now be two companies.
Splitting Cassadian off might also help EADS North America, the U.S. subsidy, in growing through acquisitions. EADS has tried several of these over the last few years with some failing due to the requirements levied on a foreign owned company. EADS while it has some success has not been able to grow as well as it had hoped in the U.S. EADS also would be able to perhaps adjust for the fact that most of its customers pay it in Dollars while it uses Euros to pay its suppliers. The current exchange rate does affect its profits.
EADS is also facing a changing market. It is clear that the U.S. and European defense budgets will not be growing as fast as they have these last ten years. Price is also becoming a major concern for the Pentagon and major defense contractors in the United States are reacting by reducing their overhead and workforce. EADS will have to follow suit if it wants to remain competitive. A major way to reduce the price of a contract proposal is to remove overhead. Eliminating a portion of their current corporate structure would be part of that. So far EADS has not announced similar moves with its workforce as General Dynamics (GD), Boeing (BA) and Lockheed Martin (LMT) have.
EADS has had to confront the issues of being a major commercial aircraft manufacturer as well as a defense contractor several times in the past. Like Boeing it has been able to balance off poor commercial performance with defense work but right now the major market is for commercial airliners as Boeing introduces the 787 and EADS their proposed A320 update and eventual replacement. The obvious decline in defense spending also means that defense work will become more competitive, especially in the U.S., and new contracts will be harder to find. The discussion of major changes with EADS structure shows that the company is planning some perhaps radical moves in reaction to the current economic situation. These potential moves ultimately may prove the right ones in the long term.