Newspaper article International Herald Tribune

Europe's Top Aerospace and Military Companies Holding Merger Talks

Newspaper article International Herald Tribune

Europe's Top Aerospace and Military Companies Holding Merger Talks

Article excerpt

Europe's two largest aerospace and military companies confirmed Wednesday that they were in advanced discussions about a possible merger.

CORRECTION APPENDED

The two biggest European aerospace and military equipment companies have said they are in discussions about a potential merger that would create an industry behemoth with a market value of nearly $50 billion.

Shares of both companies fell Thursday as investors reacted negatively to the announcement Wednesday. Despite the potential savings from combining operations, some of EADS's investors, which include the French and Spanish governments, reacted coolly.

The French conglomerate Lagardere, which owns a 7.5 percent stake in EADS, said Thursday that it had not decided whether to support the deal.

EADS, which is the parent of Airbus, and BAE Systems are looking to join forces as their respective industries become increasingly competitive. While government contracts provide steady revenue, large European countries and the United States are pulling back on their military spending, weighing on the prospects of BAE Systems. Passenger airlines, the main customers of Airbus, have perked up lately, after some difficult periods.

"They are complementary businesses," said Richard L. Aboulafia, an aerospace analyst at the Teal Group in Fairfax, Virginia. "This is a way of achieving balance from the defense side."

The two companies seem to be taking their cues from competitors.

With its acquisition of McDonnell Douglas in 1997, Boeing sought a more reliable income stream to offset the boom-and-bust cycles in passenger travel. After the terrorist attacks in 2001, Boeing's rapidly growing military business helped buffer it from a collapse in the demand for passenger jets.

The dynamic has shifted over the past several years. Boeing's commercial business has soared while its military operations have been hampered by budget cuts in many countries. BAE, which is primarily a military company, is facing the same belt-tightening in its main markets, as Airbus has experienced a surge in orders.

The merger would help the companies better weather such volatility. Currently, Airbus represents about 65 percent of EADS's revenue; after the deal, commercial aerospace would account for 53 percent of revenue, with 47 percent coming from military and security, said one person familiar with the details who spoke on condition of anonymity because the talks were continuing.

The new company would also rival Boeing. Combined annual sales at EADS and BAE topped $96 billion in 2011. Boeing's revenue was nearly $70 billion last year.

"On the face of it, this will create one of the largest aerospace and defense organizations on the planet," said Guy Anderson, a senior military industry analyst with Jane's Defense Weekly, who added that the combination would "change the European defense market beyond recognition. …

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