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Shares in BAE Systems (LSE:BAE) recently dipped by 1% to 325p, after one of the company’s investors, Invesco, slammed the management for the planned merger with EADS (PA:EAD). The company had earlier stemmed up plans to merge with European Aeronautic Defense and Space Company, EADS, in a bid to expand its market share.
Invesco, which is the largest shareholder of BAE, was clearly critical of this proposed move revealing that it “appropriates to outline its significant reservations regarding both the proposal and its impact on long-term value for BAE shareholders”.In a critical statement, Invesco admitted it did not understand the “strategic logic” behind the proposed combination.
Invesco, which owns about 13% of BAE, reckoned that the proposed merger would “appropriate to outline its significant reservations regarding both the proposal and its impact on long-term value for BAE shareholders”.
Invesco suggested that BAE could instead deliver “significant… upside value” for shareholders on a standalone basis, and that the proposed merger ratio “did not reflect BAE’s superior cash generation, or the quality of its earnings stream, derived from the length and nature of its customer contracts.”
Invesco was particularly concerned that the 5.9% dividend yield of BAE is more than double that of the proposed merge partnerwhose own dividend has been placed at 2.3%;this is bad news for both core investors and shareholders.
Revealing as much, Invesco stated that BAE’s initial announcement “did not provide any visibility for dividends beyond 2013”, and that it was “very concerned that shareholder dividends will not be prioritized in the combined group, with BAE shareholders then facing a significant drop in their dividend income.”
With this, shareholders of the company have been thrown into confusion as the price of the company continues to drop amidst concerns of further bickering between the company and its biggest investor. Invesco owns 432 million BAE shares on behalf of various institutions and retail clients, and today described BAE as “a strong business with distinctive positions in the global defense market and good stand-alone prospects.”
This expression has however given some long-term shareholders the confidence that Invesco is merely concerned about the proposed merger with EADS, and that the largest shareholder still retains keen interest in the company despite the bickering.
As plans for a merger continue to suffer a backlash, some investors will definitely move on the company’s shares under the long term hope of reaping from Neil Woodford’s (Invesco’s legendary equity income investor) track record of picking winning FTSE shares that always deliver solid dividends for shareholders.
In the long run, BAE shares may not suffer a decline for too long.
