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Defense deal raises doubts
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October 14, 1999: 11:19 a.m. ET
Dasa-Aérospatiale aerospace merger clouded by 'messy' corporate structure
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LONDON (CNNfn) - The planned merger between France's Aérospatiale-Matra with DaimlerChrysler Aerospace (Dasa) received a mixed response Thursday, as analysts welcomed the consolidation but cast doubt over the structure of the deal.
The link-up of French and German companies has long been anticipated in the industry after their U.K. rival and sometime partner, British Aerospace, broke off advanced talks with Dasa over a full-blown merger at the start of the year. BAe instead bought the Marconi defense arm of U.K. technology group GEC.
But the timing took most analysts by surprise as the industry had thought the reorganization of the European commercial aircraft consortium, Airbus, into a single entity would take priority.
"The possibility of a full-scale merger between Dasa and Aérospatiale had been anticipated, but it was thought more likely to happen after the consolidation of Airbus," Chris Jasper, business editor of trade magazine Flight International told CNNfn.com.
The mo
ve was widely welcomed for the synergies it would bring. "It is encouraging that we have finally got a big cross-border merger in the aerospace and defense sector in Europe," one London-based aerospace analyst, who asked not to be named, told CNNfn.com.
But he cautioned that the complicated structure of the new company -- called European Aeronautics, Defense and Space Company (EADS) -- could lead to similar problems encountered by some of the large U.S. defense contractors after the rapid consolidation there in the mid-1990s.
EADS will have joint chairmen, joint chief executives and dual headquarters in both Munich and Paris. "One major reservation is that the structure is a bit of a mess," one analyst said.
"I can only assume they will move to a simpler structure over time. They definitely need to do that if they want to avoid doing a Raytheon (RTN)," he added, referring to the U.S. company that this week admitted it had "taken its eyes off the ball" after growing rapidly through a series of mergers.
EADS will become Europe's largest aerospace and defense company, and the world's third-largest in terms of sales.
Dasa had sales of $9.5 billion in 1998, while Aérospatiale had revenue of $11.2 billion before its merger with the defense interests of France's Lagardere earlier this year.
This puts it close to Lockheed Martin, with sales last year of $26 billion, but still way behind Boeing, which dwarves both its nearest rivals with sales of $56 billion.
The deal leaves British Aerospace a distant second in Europe with around $14 billion in sales last year, but analysts said they did not expect a further deal to create a European super-company.
"If British Aerospace is the Lockheed of Europe, then (EADS) is the Boeing," said one analyst. "We will end up with a bi-polar Europe competing against U.S. groups rather than each other," he predicted.
The creation of EADS leaves it particularly strong on the commercial aerospace side, while BAe is a significant global leader in defense. In their respective fields, both come close to rivaling Boeing for size.
The creation of EADS poses little threat to BAe -- the two hardly compete at all, and where they do overlap they have joint ventures. The biggest joint project is the Airbus commercial aircraft consortium, which the Franco-German group now dominates with an 80 percent stake.
The major block to any further mega-merger in Europe is the likely objection from the United States on competition grounds. "If Europe put all its aerospace and defense interests in one box it will create the Fortress Europe that the United States is afraid of," said one industry insider.
EADS and BAe will need to be kept apart to provide some semblance of competition. "Although in practice there is no competition between [EADS and BAe], the current position will at least keep up the pretense," said one analyst.
Some consolidation in Europe is still expected, however. Spanish aerospace group Casa will become part of EADS after it finalizes its merger with Dasa.
Swedish aircraft manufacturer Saab already has ties with BAe and is now likely to move closer, analysts said. Italian aerospace and defense contractor Finmeccanica is also expected to pursue a deal with the British company.
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