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Forecasts 2006: Mergers - Consolidation still unlikely

Will 2006 witness the mega European or transatlantic merger? After a long period of flirting, second thoughts and spurned offers, could this be the year when wedding bells ring out for the likes of BAE Systems, EADS, Finmeccanica or Thales?
Last year saw French technology companies Sagem and Snecma tie the knot to form Safran, but an even more ambitious French-led initiative to bring together EADS and Thales faltered largely because of German opposition to the creation of a European aerospace and defence giant with its centre of gravity firmly west of the Rhine. Thales and Finmeccanica could instead rekindle their romance: the Italian company’s strength in airframes and manufacturing – it owns AgustaWestland, Alenia and Aermacchi – would be a good fit with Thales’s expertise in technology and systems integration. The combination of Thales UK and the Westland helicopter business would see the merged company vie with BAE Systems as the predominant prime contractor in Europe’s biggest defence market. It would also create a European giant to rival EADS.
As ever, politics and national pride, rather than good business sense, may be the main driver. The French may own a minority stake in EADS, but they still see it as a national aerospace and defence champion, alongside Dassault and Thales, and the Italians feel equally protective towards Finmeccanica. Even within the European Union, feelings about the need to preserve domestic high-tech industrial bases and expertise run strong.

Looking westward
After a dalliance with Finmeccanica, BAE Systems is now looking increasingly across the Atlantic for its future. Chief executive Mike Turner said last month that, had the UK’s defence industrial review not been favourable, BAE would have considered leaving the country. The Pentagon, rather than the UK Ministry of Defence, is now the company’s biggest customer. More acquisitions on the scale of last year’s $4.1 billion takeover of United Defense Industries could be on the cards as BAE widens its stateside footprint.
Dassault’s future is hard to guess. The company is majority owned by the Dassault family (EADS’s 46% stake is a legacy of a nationalisation attempt in the 1980s). While its business aviation arm is performing strongly, the defence half of its business is almost wholly dependent on the French defence budget. Its reputation as a pioneer in engineering and design make Dassault a prime takeover target, but, again, any attempt to sell one of the country’s technological jewels – even assuming the Dassault family would want to – would be met with fierce opposition.
Mergers within the USA at top tier level seem unlikely, but do not rule one out. The defence department would almost certainly resist any reduction in the remaining handful of prime contractors after the consolidation blitz of the 1990s. Further moves in the propulsion market also seem unlikely, despite rumours some years back of a tie-up between Rolls-Royce and United Technologies’ Pratt & Whitney to create a two-horse contest in large engines. And any prospect of GE and Honeywell getting back together was highly unlikely even before a European Union court last month upheld the 2001  ban on their merger. Honeywell, however, may find other suitors.

MURDO MORRISON/EDITOR

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