Leading investors in BAE Systems have warned that a potential £30bn merger with Franco-German rival EADS risks harming the long-term interests of the British defence giant and its shareholders.
Shares in BAE fell more than 10pc as investors balked at news of the merger, which must win the backing of the British, US and European governments before shareholders can vote on the deal.
Investors are concerned about the level of political interference in the new company, given that 50.14pc of EADS is effectively controlled by the French, German and Spanish governments.
“It is not clear that this is in the best interests of shareholders,” said one top 15 investor. “Under the combined structure you are replacing institutional shareholders with large stakes held by the French and German governments. This is not a good outcome because often big stakes are used to influence companies to behave in a way other than for commercial reasons.”
Another major institutional shareholder said the deal remained “half-baked”, with doubts about how the management team would be structured and how investors in the two companies would be merged.
Analysts said the proposals put BAE in play as a bid target for US defence groups such as Boeing or Northrop Grumman. “BAE management have shown an openness to ideas,” said Edmund Salvesen at Brewin Dolphin.
Talks over the merger of BAE and EADS are understood to have begun as early as April after the failure of the Eurofighter Typhoon consortium, which the companies control, to win a multi-billion pound contract to sell the fighter jet to India.
At a meeting in Munich, BAE chief executive Ian King and Tom Enders, the boss of EADS, discussed greater co-operation between the companies as a way of boosting the Typhoon project. A feasibility study was then launched by internal strategy teams at BAE and EADS, and talks about a full-blown merger began in the summer.
The deal would offer BAE the revenue growth of plane maker.
Airbus, and EADS would secure a route into the US defence market. BAE management is understood to be seeking guarantees there would be no political interference in the new company.
“What we don’t understand is that overnight BAE’s board seems to be suggesting that being a defence company is a doomed strategy,” said a third investor, of the planned drive into civil aerospace. “If it was a problem, what has the board been doing for the last five years?”
Sources close to the deal believe David Cameron and the Coalition are supportive of the proposal, despite concerns from trade unions over jobs.
Philip Dunne, the new minister for defence equipment, support and technology, said: “At this stage we are in the very early days of discussions with both companies about conditions the government would place [on a deal].”
However, there are greater fears about whether France and Germany will back the deal.
The deputy leader in Angela Merkel’s CDU party said that Mr Enders must lead the enlarged group, while there are fears in France over job losses.