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Dasa, Aérospatiale to merge
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October 14, 1999: 1:33 p.m. ET
Global aerospace industry shaken by Franco-German move to rival U.S. giants
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LONDON (CNNfn) - DaimlerChrysler Aerospace and France's Aérospatiale-Matra said Thursday they will merge to create Europe's largest aerospace and defense group and the world's number three player.
The landmark deal caught many by surprise and marked a breakthrough in long-running plans to form a single European aerospace and defense company.
European politicians have been pushing for a single entity to rival U.S. giants such as Boeing, though they have disagreed how it should be done.
The deal also was seen as a boost for jet-builder Airbus Industrie in its intense battle with Boeing.
The new company, known provisionally as European Aeronautic Defense and Space Company (EADS), will have annual sales of 21 billion euros ($22.6 billion) and overtake British Aerospace as the European market leader.
French and German regulators already have signaled their approval for the deal, and analysts said layoffs will be the crucial factor determining its success. "There is a big 'Trust me' in this deal, particularly with the French government retaining a stake," said Tom Gallagher, managing director for aerospace at First Union Capital Markets. "But the key issue is job cuts."
EADS will have twin headquarters in Munich and Paris but will be registered in the Netherlands for tax purposes. The companies currently employ 90,000 workers.
Dasa Chairman Manfred Bischoffl and Jean-Luc Lagardere, head of Lagardere, which controls 33 percent of Aérospatiale-Matra, will be joint chairmen of the new group.
The current shareholders will retain 60 percent of the enlarged company, split equally between French and German partners. Another 40 percent eventually will be sold publicly. Dasa parent DaimlerChrysler already had announced its attention to sell the Dasa unit.
Europe's new battlefield
Political and commercial disagreements have blocked plans to create a single European aerospace and defense company involving the merger partners and British Aerospace
The dissension also has slowed efforts to reform the Airbus consortium, currently a money-losing marketing alliance rather than a limited company, in which Dasa and Aérospatiale-Matra each control 38 percent. BAe has a 20 percent stake and Spain's Casa, soon to be taken over by Dasa, has 4 percent.
The Airbus partnership, which is involved in a fierce battle with Boeing for dominance in the commercial aircraft market, had formed the centerpiece of attempts to broker a pan-European tie-up.
BAe broke off merger talks with Dasa at the end of last year when they were close to completion. The U.K. firm opted for an all-British tie with the purchase of GEC's Marconi defense arm, a move that infuriated Dasa executives. BAe still is waiting for final regulatory approval on that deal.
BAe's decision led to a scramble among the players in the fragmented European industry to form new partnerships.
Dasa and Aérospatiale-Matra, which was partly-privatized earlier this year, have been talking about alliances and a possible merger for more than two years.
The German company was unwilling to cede overall management control in a merged entity and also demanded that the French government reduce its 47.7 percent stake. The merger plan will see the French stake cut to 15 percent.
While analysts have welcomed the potential synergies from the merger, some have expressed concern that the corporate structure could be unwieldy.
France's Lagardere merged its Matra defense business with Aérospatiale earlier this year in return for a 33 percent stake in Aérospatiale-Matra.
BAe in the cold?
British Aerospace (BAE) stock fell 5 percent after the announcement and closed down 4 percent Thursday.. The company said the merger plan would help speed Airbus' restructuring. "This is good for Airbu, as it creates a partnership of two equals," Tony Rice, head of asset management at BAe, told CNNfn.com.
British Aerospace currently is ranked third in the world behind Boeing (B) and Lockheed Martin (LMT), which had 1998 sales of $56 billion and $26 billion respectively.
DaimlerChrysler shares climbed 1.8 percent in Frankfurt while Aérospatiale-Matra jumped 7 percent, though Lagardere lost most of its 7 percent gain to close up just 0.4 percent.
Analysts said that while BAe may be invited to join the EADS alliance at some point, the earlier clash with Dasa made it more likely that the U.K. firm would go it alone or seek a U.S. partner.
One side-effect of the deal may be to push the Pentagon to relax its de facto ban on further consolidation in the U.S. defense industry, whose major players have shrunk from 12 to 4 over the past 10 years. 
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