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The Week Of:

A New European Aerospace and Defense Company is Born

By Rebecca Rayko
AWN Editor

The complex world of European defense companies became a bit simpler last week as two industry giants became partners. The merger of DaimlerChrysler Aerospace and Aerospatiale Matra will create Europe's largest aerospace company, but beyond that it changes the competitive landscape in the region for virtually every player in the industry.

The Franco-German entity - to be called European Aeronautic, Defense & Space Company (EADS) - becomes the third largest aerospace-defense company in the world behind Boeing and Lockheed Martin. There has long been pressure for Europe to combine its aerospace and defense companies to compete more effectively with its rivals across the Atlantic, but actually doing so has been a process plagued by challenges.

While European companies do cooperate currently on ventures such as the Airbus commercial jetliner consortium, Eurocopter and in the Eurofighter program, major alliances have been hindered by political and economic disagreements. Ironically, British Aerospace, a longtime advocate of European consolidation, is for now left out of EADS although some say this will likely be a short-term situation.

BAe and Dasa were deep into negotiations last year about merging their aerospace interests, but lack of progress prompted BAe to eventually merge with GEC Marconi. The resulting bad blood between BAe and Dasa lingered through most of the year, but a Dasa spokesperson last week confirmed that EADS is open to British companies joining them.

Others speculate that BAe, which is large enough to stand on its own, will remain autonomous or perhaps turn to the US for future consolidation. Historically, the UK and the US have partnered on many defense projects.

The commercial implications from the creation of EADS include the advancement of Airbus as a single corporate entity. This laborious process has been delayed repeatedly because of in-fighting and asset valuation issues. Things are likely to change rapidly now that Dasa owns Casa, the Spanish partner, and has joined forces with Aerospatiale Matra.

Dasa called the formation of EADS "a vital precondition to the establishment of Airbus as a truly integrated commercial enterprise."

Aerospatiale Matra said that EADS, "along with British Aerospace and Casa, wishes to form quickly a new integrated Airbus company."

That being said, it remains to be seen how EADS will address the difficult issues Airbus has yet to resolve on its road toward SCE status - although no one is disputing that the creation of EADS has simplified the process immensely. Dasa and Aerospatiale Matra, through the EADS formation, now hold an 80% stake in the Airbus consortium. BAe with its 20% stake still holds crucial veto power in management decisions.

EADS will be 60% held by DaimlerChrysler, parent of Dasa, and a group of French shareholders comprising Lagardere, the French government and private French financial institutions. The remaining 40% will be sold on both the Paris and Frankfurt stock exchanges.

The French government will sell its stake in EADS to 15% through a secondary offering. Governmental holdings in the combined European defense entity has been a source of contention among the parties for some time.

The merged company will be jointly headquartered in Munich and Paris, and co-chaired by Dasa chief executive Manfred Bischoff and Lagardere Chairman Jean-Luc Lagardere. Registered in the Netherlands, EADS expects to have annual revenue of about 21 billion euros and employ 89,000 people.

EADS plans to begin operations in the first half of 2000 after receiving regulatory approvals.

"We will be the driving force in the aerospace sector just as we are in the automotive industry," predicted DaimlerChrysler CEO Juergen Schrempp.

Bischoff said the two companies are ideal partners. "We know each other, complement each other and have a proven track record working together."

EADS will be the European leader in civil aviation, helicopters, launch vehicles, satellites and missile systems, said Aerospatiale Matra.

"In the space industry, the creation of Astrium should soon be expanded to encompass Alenia Spazio. As for missile systems, discussions are going on between Aerospatiale Matra, British Aerospace and Finmeccanica in order to create a European missile company on par with the world leader," the company said.

Even BAe was optimistic: "The integration of these businesses creates a stronger partner and offers the potential to enhance the competitiveness of the joint ventures and the many collaborative programs in which British Aerospace is involved."

As for its affect on Airbus, "The merger is a very helpful step towards the creation of the Airbus Industrie Single Corporate Entity. Only a bilateral negotiation between British Aerospace and the new merged company now remains to be concluded before the highly desirable SCE can be realized."

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