11:51 a.m. | Updated

EADS and BAE Systems ended mergers talks on Wednesday after political haggling among France, Germany and Britain killed a deal that would have created a European behemoth in aerospace and defense.

The companies’ announcement, following months of negotiations, came just hours before a deadline set by the British authorities to decide whether to proceed. The European aerospace giants aid they had been able to reach agreement on the commercial terms for the merger, but had not been able to win government support.

The breaking point was over the size of the new stakes to be held by the European governments and other political considerations,

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Under the proposed deal, France, which currently owns 15 percent of EADS, the parent of Airbus, would have had its share reduced to 9 percent. The German government had sought an equal stake in the merged company. (Spain’s stake would have been around 3 percent.)

In comments to reporters in London, Ian G. King, the chief executive of BAE, indicated that Germany was the main sticking point. “That would be an accurate representation,” he said, according to Reuters.

“We are obviously disappointed that we were unable to reach an acceptable agreement with our various government stakeholders,” he said in a statement.

One person with knowledge of the British side of the negotiations said that London and Paris had made significant progress over the last week toward bridging their differences over share ownership. But German negotiators did not seem prepared to compromise on their key concerns.

”It became clear over the last few days that there was a lack of German support for the deal overall,” said the person, who requested anonymity because the talks were confidential. ”They appeared to be struggling to see what the advantages of the deal were for Germany.”

A spokesman for the German chancellor, Angela Merkel, released a terse statement on Wednesday acknowledging the decision to abandon the merger. ‘‘For the German government, the priority is that EADS is able to continue its positive development in all its fields of business,’’ Steffen Seibert, a German government spokesman, said.

The collapse of the huge deal raises questions about future cross-border transactions in Europe.

“That government disagreements killed this deal carries a lesson for consolidation of the European defense market as a whole,” said Guy Anderson, a senior military industry analyst with the research firm IHS Jane’s. “Meshing the interests of investors and governments and bringing together state-owned, privately-owned and quasi-state owned corporations together will prove to be a Herculean task.”

By joining forces, EADS and BAE Systems had hoped to create a stronger rival to Boeing, the worlds biggest defense and aerospace company. The activities of the combined company would have been evenly split between the passenger jet market and the military market.

The passenger jet market is growing rapidly, but remains volatile. Military contracts provide more steady revenues, but large European countries and the United States have been reining in their military spending,

In September, BAE and EADS, which manufactures the Airbus passenger aircraft, said they were in discussions about a potential merger that would create an industry giant with combined market value of about $50 billion.

“It’s unlikely they will have the stomach to go through this again any time soon,” Richard Aboulafia, an aerospace analyst with the Teal Group in Washington, said on Wednesday.

In their merger considerations, EADS and BAE wanted to limit government-owned shareholdings over concerns they would jeopardize potential new defense contracts in the United States.

Under the terms of the deal, the combined company would have had a dual listings in Britain and the Netherlands, and control would have been split among France, Spain and Germany and two strategic industrial shareholders.

Germany does not currently have a stake in EADS, but a a state-owned bank had planned to buy the EADS shares held by Daimler. The position would have given Germany a smaller stake than France in the combined EADS-BAE.

Germany had also called for guarantees over long-term employment for EADS employees based in the country. It had also wanted parts of the company’s headquarters to remain in Germany.

Still, a successful merger would have put an end to a decade-old division of control between the French and German shareholders and replaced it with a more conventional governance structure.

Speaking at a press conference in Madrid, French President François Hollande, was unapologetic about his country’s desire to maintain its shareholding in a strategic aerospace and defense company. The decision to abandon the merger, he said, rested with the two companies.

”It’s not cause for me to either express regret or to rejoice,” he said.

Britain, meanwhile, had ”always been clear that it could se the commercial logic of the deal,” the office of Vince Cable, Britain’s business secretary, said in a statement. ”But it would only every work if it met the interests of all the parties involved.

The British government has a so-called golden shareholding in BAE Systems, which would allowed politicians to veto any potential deal.

While politicians may have been the stumbling block, some investors also had balked at the deal.

On Monday, the British pension fund Invesco Perpetual, the largest investor in BAE Systems, raised issues about the combined company’s ability to continue to operate in the American defense market.

“Invesco is very concerned that the level of state shareholding in the combined group will heavily impair its commercial prospects,” the firm said in a statement.

In London trading, shares of BAE closed down 1.4 percent, while EADS shares finished up 5.3 percent.

In the wake of the collapsed deal, BAE Systems, which has sought to aggressively expand in the U.S., may now become a takeover target, analysts said. Defense giants Northrop Grumman and Lockheed Martin could be potential suitors.

The British company has long-term contracts with the U.S. military to provide equipment such as the Bradley tank, but may come under financial pressure as Washington seeks to reduced defense spending.

For EADS, whose German chief executive, Tom Enders, had discussed potential acquisitions in the United States before the proposed merger with BAE Systems was announced, the failure to complete the deal will again focus attention on his company’s strategy.

Gaining access to the American market is likely to remain a priority, said Mr. Aboulafia of the Teal Group.

“EADS shareholders will want to know if the company will now pursue other acquisitions,” he added.

Article source: http://dealbook.nytimes.com/2012/10/10/eads-and-bae-systems-abandon-merger-talks/?partner=rss&emc=rss