How the Germans shot down the BAE deal The answer in my opinion is yes, so long as the goal is big enough to warrant the risk. The entire board and executive believed that the idea that creating the world's best, most able and most technologically advanced aerospace, defence and security company was a huge prize. We never, unfortunately, got the opportunity to fully elaborate with the stockholder. But we thought it was absolutely worth the obvious risks. King is equally clear. BAE will now refocus on "Plan A" - its original strategy based on growth in emerging defence markets such as the Middle East; consolidation and margin improvements in mature Western markets, where defence spending is declining; and a committed dividend policy for investors. "We have not damaged our company [or] our standing," King insisted. Let me tell you one thing - if we were worried about reputation then we would find an industry that was easier to operate in than this industry. We did the right thing to put our proposition on the table to flush out governments as to whether they were willing to sign up or not. Plan A is still a vibrant Plan A, we haven't taken our eye off the ball. In 2012 we will grow our international order book. We are committed to maintaining the dividend, none of this has affected our ability to deliver on the core strategy. We didn't believe we were in a strategic cul-de-sac before, so why would we now? King said BAE was growing in Saudi Arabia, Oman and Malaysia, to name just three countries. There would also be growth in cyber intelligence, electronic systems and commercial avionics. "We do not need to change the profile and footprint of the business," he said. Other sources close to the business said it was unlikely that BAE would look to divest itself of assets and that it would be difficult for a US giant to make a takeover bid, given American anti-trust rules. BAE sources believe the deal was leaked last month in France out of frustration at the slow progress of private talks with the German authorities. French officials appeared to believe that by pushing the issue into the open, Angela Merkel, the German chancellor, would be forced to make a decision. The problem was the decision went in the wrong direction. The Sunday Telegraph can reveal that as part of the merger negotiations, the British government demanded that the chief executive of the defence division should not only be based in the UK but should also be a British national in perpetuity. It would have been run by a Brit. Forever. A Brit," King said. Germany does not appear to have been impressed with Britain's national security "red line" on the defence business, fearing defence may itself become too prominent a part of the merged entity. "They don't see defence and security in the same way as the UK, France and the US do - as a fundamental part of the economy," King said. But it wasn't just the politics of the BAE-EADS merger that was in the wrong place. Investors were also mightily uncomfortable with a strategic change of tack that would have created a very different type of business. After The Sunday Telegraph revealed last weekend that top 10 shareholders were turning against the merger, Neil Woodford, who controls more than £15bn of assets in BAE as head of investment at Invesco Perpetual, was the first to pull the trigger. Woodford, BAE's largest shareholder with a 13.3pc stake, released a statement on Monday revealing "significant reservations" about the deal. Key to his argument was the threat to the company's 5.9pc dividend yield, and the lack of strategic logic in the combination. Speaking to other investors this weekend, it is clear he is not alone in his opinion. Woodford is understood to have the support of a number of other major investors, including Aviva. One investor, just outside the top 10 on the share register, said, however, that he did not want to see a change in management as a result of the fallout. Olver and King said they had called the top 20 BAE shareholders and that the reaction was "calm and professional." "We should work BAE as a cash cow, and forget any big deals," the investor said. A top 10 investor said: "I think Neil was raising some valid points, which I think would have been explained had the management been able to do so. The management were slightly hamstrung by the rules around the process. The real question now appears to be not about the process, but how the company's relations with the UK, US, French and German governments have been affected. "My instinct is they will not have been as badly impacted as they might have been," said the shareholder. However, a second top 10 investor was less favourable, saying that no decisions could be made until a meeting was held with the board. "They need to convince us again where they're going, and why," said the investor, who asked not to be named. They say they needed EADS, but now they're saying their original strategy is OK. We need reconvincing as to why we should own the shares. Among all those investors spoken to, there does not appear to be an overwhelming desire for the company to seek another merger or pursue a break-up, despite some suggestion last week that the latter was Woodford's intention in scuppering the deal. The same is true in the analyst community. "We are not convinced that the failure of this merger will automatically drive BAE into the arms of another suitor," argued Charles Armitage at UBS. "The likely candidates are US defence companies and we believe that they are unlikely to 'double up" their defence exposure." Although headquartered in London, BAE's management has spent much of the past 15 years turning Britain's biggest defence company into an American one. Last year, for example, the Pentagon accounted for almost half of BAE's £19bn of sales. The scale of BAE's business in the US - as well as the sensitivity of some of the technology it produces - has forced the company effectively to quarantine its American arm. King and Peter Lynas, BAE's finance director, are the only non-Americans on a board packed with retired generals, former national security advisers and ex-CIA directors. "The US doesn't want any more consolidation, that's very clear," explains Howard Wheeldon, director of policy at ADS, the UK defence and aerospace lobby group. Wheeldon's argument is that BAE is unlikely to turn to the likes of Boeing or Lockheed Martin as potential suitors. I think it's back to where [BAE] were before the talks began. I don't see any radical change occurring," he said. David Reeths, director of aerospace and defence consulting at IHS Jane's, agrees, arguing that any move by a US rival to buy BAE in full would cause significant issues for the Pentagon. Boeing is one of the five largest defence companies in the US, and BAE is the fifth largest, and there is a lot of overlap in the space. To do such a deal, it would really mean you'd have to see divestiture of some of the most profitable units, and in doing that, it could inadvertently lead to the creation of another strong player in that space. But that does not mean that US rivals won't attempt to pick off key parts of the business. Peter Arment, an analyst at broker Sterne Agee, says the "crown jewel" is BAE's electronics systems business. Based in New Hampshire, BAE bought the business from Lockheed Martin for $1.7bn in 2000. Industry insiders say the deal marked a turning point in the British company's expansion on the other side of the Atlantic as it won a bidding contest against Northrop Grumman, one of America's three largest defence companies. US industry specialists also point to BAE's land and armaments division, which would be attractive to companies such as General Dynamics, a major manufacturer of armoured trucks for the US army. BAE made a $4bn bet on the division in 2005 when Mike Turner, then chief executive, snapped up United Defense Industries in the largest ever foreign takeover of an American defence company. Wallace, who wrote and co-ordinated a letter from 45 Tory MPs criticising the EADS deal the weekend before it collapsed, was in Washington when news broke that the talks had ended. "I am pleased that reality has hit home with BAE senior management," he said at the time. As long as those two squabbling government shareholders [France and Germany] were present, the deal should never have been promoted. Leopards don't change their spots and it was clear to me from the outset that British jobs were at risk. But, talking to The Sunday Telegraph this weekend, Wallace said the startling truth he learnt from his trip was that there had been no discussions between the British government and US senators over the deal. "There was a total absence of senate liaison from the British on this, and due to the separation of powers in the US, they are an important constituency," he said. Wallace met the staff of 12 senators as well as the Senate Armed Forces Committee and members of the Treasury department while in the US. "What was clear was the amount of discussion that the UK government and BAE had entered into was rather thin," he added. However, he believes that with the EADS deal now not going ahead, the British company is in a far stronger position. "It's clear that BAE enjoys tremendous success in America because of Britain's position, and that would not have happened in a merger with EADS," he said. In terms of where BAE goes from here, Wallace continued: "Don't listen to those who talk about shrinking defence markets. The company is in a much healthier position than EADS, with not just its prime contractor role but also its through-life support contracts. And let's not forget that while defence budgets are being cut, homeland security budgets are increasing, and there are opportunities there. King argues that the breakdown of the merger talks does not mean that BAE and EADS will inevitably drift apart. I would argue that our relationship with EADS will become closer. Tom [Enders, EADS chief executive] and I have known each other for a long time. The executive have behaved impeccably throughout this," he said. We were absolutely clear that if we stopped this we would do it in absolute agreement. BAE's job was to "deliver" the UK and the US. As King says, the UK government was "leaning forward" and supportive. America's real position is a moot point as it was never really tested. It was EADS" job to get Paris and Berlin over the line. That never happened, and some have blamed Enders" over-optimistic analysis of the European governments" position. Olver and King will now go back to Plan A, which they say is up to the job. Any more missteps and investors" patience will be sorely tested.