The First Shot In A Volley Of Defense Mergers?

The Thomson Matra deal will spark more liaisons in Europe

For years, Jean-Luc Lagardere has been trying to turn his French defense company, Matra, into a European giant--building it up piece by piece. Way before such efforts were in fashion, he began crafting joint ventures with missile makers and satellite builders in other European countries. But on Oct. 16, his chance came to catapult himself into the big leagues at last. The French government's decision to sell defense-and-electronics giant Thomson to Lagardere will transform his new Thomson Matra into Europe's strongest defense player, with $12.1 billion in sales.

Now that he's the heavyweight, 72-year-old Lagardere is ready to shake up the industry. With shrinking defense budgets and overcapacity, much of Europe is vulnerable. By 2000, he predicts, only one or two European companies will be left in each main defense sector. Lagardere has set his sights on acquiring or teaming up with several European partners that could give his company the global stature of a Hughes Electronics Corp. or Lockheed Martin Loral. "At the end, what's important is that one or two actors in Europe face the one or two actors in the U.S.," he says.

Until now, the French government's refusal to consolidate its state-owned defense companies has stalled progress on any cross-border deals. France alone represents one-third of the entire European industry. The Thomson sale breaks the logjam. "It will give a very strong push to industry integration," says Philippe Grasset, a Brussels defense analyst.

At the center of Lagardere's strategy is the missile business. Earlier this year, Lagardere and British Aerospace PLC merged their missile-manufacturing divisions to create Matra BAe Dynamics, with $1.5 billion in sales. The company is the largest missile maker in Europe--only slightly smaller than U.S. leaders such as Raytheon Co. Thanks to that liaison, Thomson Matra will be No.1 in the aviation industry's hottest market: retrofitting aging warplanes with the most advanced missiles and electronic systems.

Now Lagardere hopes to forge ties with Germany's defense electronics industry, too. One partner could be Daimler-Benz Aerospace (DASA). For the past two years, DASA has been negotiating with France's money-losing Aerospatiale to merge their missile businesses, but industry sources say that DASA's interest in Aerospatiale has cooled. Lagardere says that he is interested in any proposal "that would increase the weight of Thomson Matra." Looking across the Channel, he's also prepared to build upon his existing alliances with Britain's GEC-Marconi and BAe in products ranging from satellites to sonar.

FAST-FORWARDING. Lagardere believes that the European industry's restructuring will take place more rapidly than many observers think. Witness the current redundancy in the European jet-fighter and missile businesses. While the U.S. has five warplane and missile makers, Europe has 10. The European industry is struggling to produce three competing new fighters. Together, they're costing upwards of $25 billion to develop, a sum governments can no longer afford. In France, the government has arranged a shotgun marriage between two troubled manufacturers, Aerospatiale and Dassault. But that Franco-French alliance still has to get its costs down to compete against U.S. and other rivals and will probably seek another European partner. Eventually, only one or two producers will survive. Another possible partnership down the road would be DASA and BAe.

While a large proportion of Europe's defense sales is still to European buyers, global competition is also putting pressure on the whole industry. The average costs of European defense contractors run some 30% higher than in the U.S. Even though the radical overhaul of Europe's defense industry that Lagardere envisions will be politically painful at a time of unemployment, "the trend is irreversible," he says. "You can't stop restructuring just because it's politically difficult." Lagardere seems ready to force the issue.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE