LONDON, Sept 13 (Reuters) - The idea of a $48 billion merger to form the world's biggest aerospace and defence group was hatched in June at talks that "started as a bit of banter".
Before too long, the EADS aerospace company and defence heavyweight BAE Systems, both of which supply top secret and highly complex cryptanalytical technology to government, chose codenames in the fast-moving talks.
The codenames started rather simply, with the real first letters of their names: Elm for EADS and Birch for BAE Systems.
"What initially started as a bit of banter turned into serious talks on how to increase cooperation between the two groups through joint-venture," said a source with knowledge of the talks, who asked not to be named.
"And as discussions progressed they decided to bring cooperation even further with cross capital-investments."
The June talks were between Tom Enders, head of EADS (European Aeronautic Defence & Space Co) and a former German paratrooper, and BAE's Ian King, both of whom had talked in the past about giant defence mergers.
"It was rather like a school reunion," said a person familiar with the negotiations.
A pivotal point towards potentially the biggest shake-up in the European aerospace and defence sector in a decade came at a dinner on July 12.
France's defence and finance ministers met Enders and EADS strategy chief Marwan Lahoud over supper and gave the green light to press on, a person with knowledge of the talks said.
Enders and King rapidly realised they could make it happen, some 14 years after Enders failed in an earlier bid to create a pan-European giant capable of taking on America's Boeing.
In 1998 Enders, then the head of corporate strategy at Daimler's former defence business Dasa, pushed for a merger with BAE Systems, which was rebuffed.
Fast forward to June 2012 when Enders took the helm of Airbus parent EADS, and he told colleagues to expect something bold to make his mark on the group.
That mark emerged on Wednesday, when EADS and BAE Systems said they were in advanced talks over a strategic merger to create a global giant, seen partly as a way of dealing with a shrinking defence sector.
In the tie-up, EADS would own 60 percent and BAE 40 percent of the new group.
The combined group would make products ranging from Airbus commercial planes to Typhoon warplanes and Astute class nuclear-powered submarines.
After being appointed head of EADS, former Airbus boss Enders had met BAE chief executive King as partners in the Eurofighter warplane programme in June.
Closer ties were floated, followed by a feasibility study.
To keep the talks - which were given several codenames including Project Hawthorne - under the radar both companies chose the codenames.
In July, the parties met at a hotel near Enders' residence outside Munich and the decision was made then to go ahead. The 60-40 split was decided early as the two sides advanced.
Enders and King had already established close ties during the fruitless 1998 merger talks, which led Daimler to form EADS with the French, and British Aerospace to become BAE Systems after buying General Electric's defence arm GEC-Marconi.
In 2003, BAE rejected another merger offer, this time from French defence electronics firm Thales.
BAE's CEO at the time was Mike Turner - now chairman of British aerospace group GKN - who favoured a deal with a U.S. group such as Lockheed Martin or Boeing, which failed to materialise.
A potential EADS-BAE tie-up also fulfils a long-held dream of Jean-Luc Lagardere, French entrepreneur and former joint president of EADS.
"You could say that 15 years on the wheel has now come back round to what people were trying to do in the 1990s," John Weston, chief executive from 1998 to 2002 of what became BAE Systems, told Reuters.
From EADS' side, the deal was chiefly driven by Enders and Lahoud - EADS' stragetist and a former chief executive of missile maker MBDA, which is jointly owned by EADS, BAE and Italy's Finmeccanica.
"Lahoud knows the BAE management and the personalities within the company very well, he also knows the British government very well and he made a lot of the running - it was a real joint venture between Lahoud and Enders," a source close to EADS said.
Lahoud was also a key figure in the 2006 deal which saw EADS buy BAE's stake in Airbus for $3.5 billion.
A source close to EADS said the likely outcome of current negotiations would see a manager from Britain overseeing defence with French and Germans sharing the rest.
"Enders will likely head the group, Fabrice Bregier will stay at the helm of Airbus, Astrium will keep a French boss and Lahoud is expected to take a very prominent executive role close to Enders," the source added.
Another source said the chairman and chief operating officer would probably come from BAE Systems.
Other key players in propelling the deal included BAE's finance director Peter Lynus and its strategy chief Kevin Taylor along with EADS finance director Harald Wilhelm and the head of its UK unit Robin Southwell.
Advisers said that both groups had consulted closely with governments in Britain, Germany, France and Spain, since the talks started early in the summer. The U.S. government had also been informed about the talks.
Three sources familiar with the situation said EADS and BAE Systems had in fact started putting tentative feelers out about a possible merger up to a year ago. Others said the talks started in earnest this summer.
EADS-BAE believe the merged entity, which would have a dual stock-listing, would have lower costs and more balanced commercial and military operations.
"This looks like it is one of those 'what ifs' that will actually come off," said a source close to EADS.