European Merger Would Create an Aerospace Titan

Two of Europe’s aerospace giants, DaimlerChrysler Aerospace of Germany and Aerospatiale Matra of France, agreed Thursday to a merger intended to challenge the world leadership of Boeing Co. and other U.S. firms in the aircraft, space and defense industries.

The new company, to be called EADS--European Aeronautical, Defense & Space--would become Europe’s largest aerospace concern and the world’s third-largest after Boeing and Lockheed Martin Corp.

The deal not only helps consolidate the fractured European aerospace industry but is an important symbolic step in European political and economic unity, joining the formidable aviation and arms industries of France and Germany.

And in both the commercial and defense aerospace markets, EADS could present a stronger challenge for many of the aerospace programs remaining in Southern California, where Boeing, Lockheed Martin, Northrop Grumman Corp., TRW Corp. Raytheon Co. and Hughes Electronics Corp. have operations. The firms make parts for Boeing jets, satellites, rocket launchers and defense electronics.

The value of the merger was not disclosed, but the combined company would have sales of about $22.5 billion and 89,000 employees. By creating EADS, French and German interests also would control 80% of Airbus Industrie, the main competitor to industry leader Boeing in the global market for commercial jets.

The other major Airbus partner is British Aerospace, which said it welcomed the announced merger, in large part because of how it would help Airbus. Speculation also arose that British Aerospace might eventually join the group.

Airbus currently is structured as a consortium of several European companies, some with state backing. But the merger deal is seen as accelerating Airbus’ long-planned transition to becoming a private company with the streamlined autonomy it needs to better compete against Seattle-based Boeing.

Boeing, meanwhile, has long complained that Airbus had an advantage in undercutting Boeing on prices for jetliners because Airbus was effectively state subsidized. Boeing Chairman Philip Condit welcomed Thursday’s merger announcement, saying an independent Airbus that is subject to publicly available accounting standards would make more rational decisions about pricing.

“As they move to a truly commercial basis, I think that’s good,” Condit told industry analysts in a conference call.

But the combined resources of Aerospatiale Matra and DaimlerChrysler Aerospace--known as DASA, and a unit of the auto giant recently formed by Daimler Benz and Chrysler Corp.--could still mean stiffer competition for Boeing and other U.S. aerospace firms.

“One of the more compelling areas [of competition] is going to be in the market for aircraft missiles and weapons systems,” said analyst Todd Ernst of Prudential Securities Inc. in New York.

Airbus has already grown into a tougher challenger for U.S. firms, nearly pulling even with Boeing in market share in recent years and all but putting out of business the former Douglas Aircraft operations in Long Beach, now owned by Boeing. The merger, moreover, comes at a time when the U.S. defense industry is struggling to cope with cost overruns and an uncertain future for some of the biggest-ticket Pentagon weapons programs.

The European companies noted that EADS would be market leader in helicopters through its Eurocopter unit, and their merger would enhance its role in satellites, military aircraft, air-to-air missiles, antitank weapons and defense-surveillance gear.

Also, Aerospatiale builds the widely used Ariane line of rockets for launching satellites and is a major rival to Boeing and Lockheed Martin in that market. Ironically, the proposed merger came at a time of widespread speculation that U.S. aerospace giants--having gotten tentative support from the Pentagon--were seriously weighing whether to make their own merger deals with Europe’s big defense players.

A wave of mergers already has occurred in the U.S. market, creating such behemoths as Boeing, Lockheed Martin and Raytheon. Linking with European rivals was seen as giving those companies even more of an advantage in competing for new contracts around the world.

In turn, the Europeans were seen wanting to tap into the enormous sums that U.S. defense companies have spent on research and development of new aerospace technology in recent years. One stumbling block to such mergers, though, would be whether U.S. defense secrets could be protected.

For now, though, “we will be the driving force in the aerospace sector, just as we are in the automotive industry,” declared Juergen Schrempp, co-chairman of DaimlerChrysler.

“This is good for France, good for Germany and for Europe,” German Chancellor Gerhard Schroeder said after the signing ceremony in Strasbourg, France. “It’s not every day that we can welcome a merger of this type.”

But even Schroeder left the door open for U.S. involvement. He described the creation of EADS as a “decisive thrust for European autonomy,” but added that the merger was nevertheless open to “partners from the other side of the Atlantic.”

The proposed merger would combine DASA--which itself has acquired the small Spanish aerospace company, CASA, which is the other Airbus consortium member--with Aerospatiale Matra of the Lagardere Group of France.

The merged company, EADS, will be 60% owned by DaimlerChrysler and its French partners. The remaining 40% will be sold to public investors after regulatory authorities approve the deal--expected in the first half of next year.

DaimlerChrysler’s stock value soared nearly 5% on the Frankfurt DAX exchange after word of the merger, and Aerospatiale Matra rose more than 7%. On the New York Stock Exchange, DaimlerChrysler’s stock rose $2.44 to $75.06 a share.

French Prime Minister Lionel Jospin said of the merger, “A decisive stage in integration of the European aviation and space industry has been accomplished.”

British Aerospace scuttled an earlier consolidation scheme in February, prompting Schrempp to angrily proclaim the mission of European cooperation and integration as hopeless.

But both French and German officials noted after the merger announcement that the new company is open to more players.

“We are holding the door open for other Western Europeans,” Lagardere chief Jean-Luc Lagardere told reporters in Strasbourg, clearly referring to British Aerospace.

DASA Chief Executive Manfred Bischoff and Lagardere would jointly head the EADS board. The corporation, with headquarters in Munich and Paris, will be registered in the Netherlands.

“DASA and Aerospatiale Matra have been working together in a wide range of European programs for years,” Bischoff said. “We know each other, complement each other and have a proven track record working together.”