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Deal may affect Pentagon
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October 14, 1999: 10:46 a.m. ET
Dasa-Aérospatiale merger may cause reconsideration of M&A policy
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LONDON (CNNfn) - The U.S. Defense Department may be forced to rethink its policy on mergers affecting its contractors in the wake of a giant European aerospace deal, analysts said Thursday.
The Pentagon and the Justice Department last year blocked the planned $10.7 billion merger between Lockheed Martin (LMT) and Northrop Grumman (NOC), citing antitrust concerns following a wave of consolidation in the industry.
However, the planned merger of Germany's DaimlerChrysler Aerospace and France's Aérospatiale-Matra, announced Thursday, will create a global giant with sales of $23 billion, ranking it behind only Boeing (BA) and Lockheed Martin.
Tom Gallagher, managing director of defense and aerospace at First Union Bank, said the deal may push the Pentagon to reassess its strategy. "This could conceivably cause a re-think," he said.
The U.S. defense sector has shrunk since the end of the Cold War to a core of just four from a dozen major contractors bidding for contracts from the Pentagon and overseas.
Boeing, with annual sales of $56 billion, is the global leader, followed by Lockheed's $26 billion in sales. Raytheon (RTN) is ranked number three, followed by Northrop Grumman.
Gallagher said competition in the sector will increase as consolidation accelerates in Europe's fragmented aerospace and defense sector. "The landscape of giants and pygmies is not a good thing," he said. "This deal will make the U.S. industry more competitive."
Pentagon officials have already made attempts to broker closer ties between U.S. and European defense companies in a bid to improve the competition for government contacts.
Jacques Gansler, the Pentagon's head of acquisitions, met with leading European industry participants and governments earlier this year. He said the Defense Department was looking to change its policy on mergers and acquisitions in the sector, and did not rule out approval of a European acquisition of one of the U.S. companies such as Northrop Grumman.
Boeing stock rose 1-1/4 to 41-3/4 in early trading Thursday after the Seattle-based firm beat third-quarter earnings estimates. Lockheed Martin was off 3/16 at 27-7/16 while Northrop Grumman was unchanged at 56-1/16. 
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