BAE Systems has a plant at Rochester Airport employing 1,400 people

by business editor Trevor Sturgess

A proposed merger between defence giant BAE Systems and civil aviation specialist EADS has been called off.

The ambitious scheme that would have created the world's largest aviation business was grounded because governments with a stake in the companies for national security reasons could not agree on a dilution of that stake.

BAE, which has a plant at Rochester Airport employing 1,400 people and making head-up displays for Eurofighter aircraft, and EADS were disappointed by the outcome.

They believed the merger was based on sound industrial logic. BAE has faced a shrinking customer base for defence equipment, while Airbus manufacturer EADS faces formidable competition from Boeing.

However, it ran into turbulence almost immediately - with leaks about the talks catching both companies on the back foot.

Major shareholders accused BAE of poor communications, culminating this week in Invesco Perpetual, which owns 14% of BAE shares - denouncing the merger for not having any sound logic behind it.

MPs had expressed concern about the merger, fearing it would lead to job losses. While employees at Rochester and elsewhere had been assured their jobs would be safe, there were understandable fears that these promises would prove hollow once a merger had been completed.

However, bosses from both sides insisted it was based on sound industrial logic, representing a "unique opportunity to create a combination from two strong and successful companies greater than the sum of the parts".

Despite extensive talks with governments of the UK, France, Germany and the United States - which was particularly sceptical - no agreement could be reached. BAE and EADS decided it was in the best interests of their companies and shareholders to terminate discussions.

Ian King, chief executive of BAE Systems, said: "We are obviously disappointed that we were unable to reach an acceptable agreement with our various government stakeholders. We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world class and complementary businesses to create a world leading aerospace, defence and security group.

"However, our business remains strong and financially robust. We continue to see opportunities across our platforms and services offerings and in the various international markets in which we operate. We remain committed to delivering total shareholder value and look to the future with confidence."

Tom Enders, EADS chief executive, said: "It is, of course, a pity we didn't succeed but I'm glad we tried. I'm sure there will be other challenges we'll tackle together in the future. EADS will continue on its international growth path and our shareholders can continue to expect profitable growth, excellent liquidity and programme execution based on a strong order book."