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Friday, December 4, 1998 Published at 19:12 GMT

Business: The Company File

Defence mechanism

A wave of massive mergers has swept through the western world's defence and aerospace industry in recent years.

Spiralling costs at the end of the Cold War forced firms to get together to save money and finance the huge expense of developing new weapons and aircraft.

[ image: Boeing is slashing 48,000 jobs worldwide]
Boeing is slashing 48,000 jobs worldwide
A year ago, European governments called on industry leaders to overcome their difficulties and create a European wide aerospace and defence company (EADC).

Governments and companies in the UK, Germany, France, Spain, Italy and Sweden have been involved in the negotiations.

The pressure to unite stems from a feeling that American firms like Boeing and Lockheed are forging ahead with consolidation, leaving Europe standing in the blocks.

However there is also concern that merging the major players will damage competition in Europe and could lead to higher prices.

Anglo-German merger

A link-up between industry giants British Aerospace and Germany's DaimlerChrysler Aerospace (Dasa) looks like being the first step towards the goal of an EADC.

Followers of the companies believe a deal could be agreed within six months, creating a combat aircraft, defence electronics and services company that would rank third in the world.

Between them, BAe and Dasa already own 58% of Europe's main airframe manufacturer Airbus and also assemble Eurofighter combat aircraft.

Both have substantial stakes in other defence businesses, as well.

French lobby

Any convincing pan-European aerospace and defence industry will need a French presence.

France's Aerospatiale, another partner in Airbus, is keen to get involved but the major stumbling block has been the French government's holding in the firm.

BAe and Dasa are reluctant to merge if any government is involved as a shareholder.

[ image: Prime Minister Lionel Jospin wants France to be part of any pan-European venture]
Prime Minister Lionel Jospin wants France to be part of any pan-European venture
France wanted a three-way partnership from the start and pledged to cut its stake in Aerospatiale.

The French government has reacted angrily to any suggestions that it might be left out.

However there is now a realisation that the process may take too long, given the pace of worldwide consolidation, and that France may have to link up later.

Prime Minister Lionel Jospin said he was still committed to eventually joining the partnership.

He said: "We remain faithful to that and we believe our potential and experience in the aeronautic sector is undeniable, so we will tackle the following stage...with great confidence."

GEC joins the fray

The quickening pace of negotiations has pushed other defence firms like GEC to also take the plunge and join in.

For years there have been suggestions that GEC might merge with, or take over, British Aerospace.

Recent rumours have also linked GEC with the French group Thomson-CSF.

GEC's chief executive Lord Simpson has made it clear a big deal is definitely in the offing for his firm.

He said GEC had been in "very, very intense" discussions for several months with major defence companies on both sides of the Atlantic.

"These discussions have progressed extremely well and GEC now expects to make a decision on its future course soon...In the next few weeks we will decide which strategic course we wish to adopt," he said.

Rumours flying

Lord Simpson would not be drawn on whether GEC was contemplating another deal in the US, to build on its $1.4bn purchase of defence electronics firm Tracor.

He said: "We have talked to every single player in the global defence industry...and out of all of these discussions we have developed a number of options...The GEC board will now decide which way it wants to go forward."

There is speculation that GEC could also be considering another deal in the United States, where Northrop Grumman is still a spinster, after its proposed takeover by Lockheed Martin was blocked by the US Department of Defence.

The only real certainty is that by this time next year the European aerospace industry will be radically different.

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