BAE Systems/EADS - turbulent time It has barely started, but the defence industry downturn already has the first notch on its bedpost. BAE Systems and EADS are discussing a tie-up in which the UK defence company would be the decidedly junior party, with a 40/60 ownership split. And to think that two years ago BAE - with a market cap of £10.5bn before the news of the deal leaked on Wednesday - was worth more than EADS (market cap €24bn). This is a combination with a lot of politics and rather fewer synergies. Take the latter first. There should be cost savings from combining defence and civil aircraft manufacturing. Both companies say there are potential cost savings from procurement and sourcing efficiencies. These should not be discounted, but there is little overlap between military and civil aircraft manufacturing. A more obvious rationale from BAE's perspective is that it would reduce its dependence on the US defence market. BAE generated 45 per cent of 2011 revenue in the US, while EADS generated 12 per cent of revenue in North America. What EADS would gain from increasing its own exposure to the US is less clear, although it might hope to find a more receptive market for its Airbus aircraft. This is effectively a takeover of BAE by EADS, which is probably a fair reflection of the former's shrinking market. Defence spending is falling sharply on both sides of the Atlantic - the US defence budget has been shaved by nearly $500bn over the next decade. Still, BAE's shareholders look to be getting the better of any agreement. BAE would account for a third of sales and earnings in a combined company; its shareholders would own 40 per cent. The absence of real cost savings might make a combination more palatable to the myriad political interests involved - both EADS and BAE are big employers. But it would make integration tougher.