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Tuesday, January 19, 1999 Published at 14:26 GMT

Business: The Company File

Battle for Europe's defences

Behind the decision by British Aerospace (BAe) and GEC's Marconi division to join forces is a tale of political intrigue, boardroom battles and executive egos.

Europe's defence giants have been playing out a war of their own over the past few months, with corporate generals trying to mastermind a much bigger share of the industry.

Now at least the labyrinthine talks have led to a deal. Two UK defence behemoths, who have traditionally been bitter enemies, have thrashed out a deal which promises to kick-start the transformation of Europe's defence industry.

[ image: Hopes of a BAe-Dasa merger have been sunk for now]
Hopes of a BAe-Dasa merger have been sunk for now
The deal, in itself is not a surprise. However, the fact that it has taken so long to achieve is - and it does not come without risks.

BAe and Marconi are gambling that they will now form the central cog in a much larger defence machine.

Their decision to go down a 'UK-first' defence route, and ignore the overtures of German and French rivals, has caused consternation in the European corridors of power.


Almost a decade after the fall of the Berlin Wall, European defence companies are finally adapting to the cold wind that has blown through the industry since the end of the Cold War. Falling demand and the growing threat of the mighty US defence giants has forced the Europeans to act.

Just before Christmas, BAe seemed set to merge with Dasa, the defence and aerospace arm of German group DaimlerChrysler, only to have Marconi gate-crash the party at the 11th hour.

GEC was holding its own talks with Thomson CSF, the French defence group in which the French Government still owns a large stake.

Thomson would probably have made a better partner for Marconi. The two companies have worked together closely in the past, their businesses are a better fit and the resulting cost savings could have been much higher.

High stakes poker

[ image: What will happen to Airbus now?]
What will happen to Airbus now?
However GEC played a game of poker where the stakes could not have been much higher. It put Marconi up for sale and called BAe's bluff. The prospect of a Thomson deal was bad enough for BAe, but GEC was also courting US groups such as Lockheed Martin, Northrop Grumman and Raytheon.

Faced with a bidding war, BAe made an attractive offer for Marconi and Thomson balked at increasing its own bid.

BAe's decision has already invoked the wrath of Dasa. The German group has said it is now looking elsewhere for new alliances, both around Europe and across the Atlantic.

City analysts point out that Dasa wanted to be joint captains at the helm of any European-wide defence colossus. If BAe had merged with Dasa, the Germans would have owned a stake of at least 40% in the combined group. However if Dasa now merges with the BAe-Marconi combine, its stake and therefore its influence over the group will be diluted.

Political influence

Gerhard Schröder's German government was believed to favour a deal between BAe and Dasa and senior politicians pushing for an Anglo-German deal will be miffed at the BAe decision.

UK Prime Minister Tony Blair also backed a merger with Dasa as part of a government drive to see BAe at the heart of a new European defence vehicle.

Dasa and the German government could instead push for a tie up with the French defence industry, which is itself undergoing a dramatic shake-up. The spurned Thomson-CSF is an obvious target. So too is Lagardère, whose Matra defence arm is merging with fellow French state-owned defence group Aérospatiale.

Italy's Finmeccanica, Spain's Casa and Sweden's Saab are also likely to be involved in future talks.

Tensions flying high

The future of European plane maker Airbus has also been thrown into doubt.

Airbus is jointly owned by Dasa, Aérospatiale, BAe and Casa. In an ideal world, Airbus would form the civil arm of an integrated European defence group. But with tensions running high among its partners, there could be more squabbles ahead.

Then there are the increasingly vociferous attempts by European defence groups to penetrate "Fortress America" by linking with industry giants over there.

The BAe deal is just the beginning of the further consolidation of the European and indeed the global defence industry. Defence chiefs are bound to hold more intense talks over the next few months.

This may be a great day for the UK defence industry, but BAe is still well behind its major US rivals in terms of sales. It could still find itself left on the sidelines as its major competitors form a wider European alliance.

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