British company BAE Systems PLC and EADS NV, which has headquarters in the Netherlands, indicated the discussions were beyond the preliminary stage. They also cautioned that any merger agreement would need approval from a number of governments as well as customary approvals from their respective boards of directors and stockholders.
"BAE Systems and EADS believe that the potential combination of their two businesses offers the prospect of significant benefits for customers and shareholders of both companies," BAE Systems said in a news release that confirmed industry and stock market speculation that a merger was in the works.
These benefits include cost savings, such as from procurement and sourcing efficiencies available to the enlarged group, and substantial new business opportunities."
But, it said, "there can be no certainty that the discussions will ultimately lead to a transaction."
BAE Systems was founded in 1999 by the merger of Britain's Marconi Electronic Systems and British Aerospace. Its business portfolios cover a wide range of defense, aerospace and security products and services. Among major programs it and its worldwide subsidiaries are involved is the F-35 Lightning II jet fighter, the Eurofighter Typhoon, as well as in the building of Britain's Astute class submarines and the Queen Elizabeth class aircraft carriers.
EADS also has a broad business portfolio. Among the group's companies are Airbus, Astrium, Cassidian and Eurocopter.
The companies, which have collaborated in the past, are working together on the Typhoon fighter and in various joint ventures of missile company MBDA.
The merger plan being hashed out by BAE and EADS envisages an enlarged business group with a unified management structure, identical boards of directors and executive committees. EADS shareholders would own 60 percent of the new group, while BAE shareholders would own the remainder.
Each would be listed separately on their respective stock exchanges. Special shares in BAE Systems and EADS would be issued to the governments of France, Germany and Britain "to replace the existing U.K. government share in BAE Systems and the stakeholder concert party arrangements in EADS."
Since BAE Systems' dividend payments to shareholders are traditionally higher, EADS would pay its shareholders more than $322 million to better align the parties' payout ratios but any such payout wouldn't affect the companies' dividend payments for 2012.
BAE said that under government regulation both companies are required to announce their intention to proceed or abandon the proposed transaction by Oct. 10. However, BAE said it intends to ask for an extension of the deadline if negotiations with EADS are still occurring at that time.