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BAe snags GEC defense arm
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January 19, 1999: 8:17 a.m. ET
But markets give sour response to $12.7B merger of U.K. defense giants
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LONDON (CNNfn) - In an all-British deal that promises to realign the European defense landscape, British Aerospace announced Tuesday it has agreed to acquire General Electric Company's defense arm, Marconi, for $12.75 billion.
The announcement put an end to long-standing speculation about a marriage between the two. But it failed to quell concerns from jilted suitors that the agreement marked a retreat from their professed goal of forming a borderless defense behemoth.
The purchase will spawn New British Aerospace, the world's third-largest defense giant, behind Boeing and Lockheed Martin of the U.S., with leading positions across a vast swathe of global aerospace and defense markets.
The beefed-up new company will be worth 15.6 billion pounds, or $25.8 billion. It will generate annual sales of around $20 billion.
GEC Chief Executive Lord Simpson said both companies had been conducting intense talks with the British government, which had been "generally supportive" of their plans, Reuters reported.
A "totally compatible" deal
BAe's chief executive, John Weston, described the deal as the first step towards rationalizing the defense industry. He told Reuters the merger was "totally compatible" with European integration.
European rivals have taken a grimmer view, however, viewing the BAe-GEC marriage as a foil to their grander plans of gradually melding their disparate pieces together into a pan-European defense and aerospace network.
Investors are wary of the deal, too. Many believe BAe is paying too high a price for Marconi, a specialist electronics and defense equipment maker which has been a subsidiary of GEC since 1968. (The unit assumed its current corporate moniker - Marconi Electronic Systems - last year.)
Reflecting the sour sentiment, shares of both companies dipped following the announcement and continued on a downward trajectory.
Shares in British Aerospace (BA.) gave up 11 percent to 439 pence, while GEC (GEC) stock had slumped nearly 5 percent to 551 pence.
Paul Beaver, of Jane's Defense Weekly, believes the deal will foster greater, not less, deal-making down the road.
"This is not about fortress Europe, this is about consolidating the European industry so it can become a global player in the same way the Americans have," he said.
"There will continue to be trans-Atlantic tie-ups, there must be transatlantic tie-ups as we go towards globalization."
Not getting the upper hand
Beaver played down concerns that the merger would create a British monolith to the detriment of the rest of the industry.
"I don't think the Brits are going to go for the upper hand in this," he said. "They would like to see the European Aerospace and Defense Company formed. They don't feel they need to dominate it. What they want to do is get the ball rolling."
BAe had been pursuing the formation of such a cross-border group in separate merger talks with Germany's DaimlerChrysler Aerospace (Dasa).
France's Thomson-CSF (PHO) had tried to buy Marconi from GEC. Thomson declined to directly comment on the merger news across the Channel Tuesday. But it confirmed a report in London's Financial Times that the company was dismayed it had failed in its bid to woo Marconi.
BAe is apparently keen to scout out other opportunities for further consolidation in the industry. The British company is currently said to be still talking with DaimlerChrysler, on other avenues of cooperation.
Beaver noted that BAe already has ventures in place with the twin pillars of the U.S. defense industry, Boeing (BA) and Lockheed (LMT), adding that BAe has "already got its fingers in the continental pie, and will continue that way."
A roadblock or a facilitator?
Nonetheless, some rivals believe the merger will erect a roadblock towards carrying out the goal of integrating the industry along new lines, away from a Cold War-era model. In this vision, they are hoping to play catch-up with nimbler U.S. giants, which have managed to revamp their operations in the wake of the decline of the Soviet threat.
Under terms of the transaction, which is being structured as a demerger, BAe will effectively pry away GEC's defense unit, Marconi Electronic Systems, from the parent company.
Shorn of Marconi, GEC will be left to focus on technology and communications.
GEC shareholders will receive about 1.17 billion New British Aerospace ordinary shares. BAe shareholders will end up controlling roughly 63.3 percent of the new company, while GEC stockholders will own the remainder.
The Financial Times said BAe will reap annual savings of around 275 million pounds, or $454.77 million from the merger. BAe expects the deal to raise its earnings per share by 16 to 18 percent annually in three years.
British Aerospace posted profits of 675 million pounds in fiscal 1998 on sales of 9.24 billion.
The company also owns 20 percent of Airbus, the European plane making consortium that is Boeing's arch rival.
--From staff and wire reports
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