Company of the week: British Aerospace

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British Aerospace agreed to buy GEC's Marconi defence unit for pounds 7.76bn, creating the world's third-largest defence group. BAe will issue pounds 5.77bn worth of shares and assume pounds 1.55bn of Marconi's debt. The cost exceeded investors' expectations and BAe shares fell 19 per cent.

The combined company will make equipment from Eurofighter jets to electronic components for missiles, and with sales of pounds 12.4bn will rank only behind Boeing and Lockheed Martin of the US. The purchase will pressure French and German companies to merge to compete with BAe, which said it may look to the US for further alliances.

"It's expensive, but it's necessary that they consolidate," said Rich Turgeon, a defence analyst at US Society Asset Management. Europe's defence companies ""are several years behind the US in what they need to do."

A fifth of the company's sales will be in the US, dwarfing other European companies' presence in the world's biggest market.

The purchase, however, makes it "impossible" for BAe to merge with DaimlerChrysler Aerospace, the German company said. John Weston, chief executive of BAe and of the newly combined BAe-GEC Marconi, has been in talks with Manfred Bischoff, Dasa's head, for months. But Dasa said it doesn't want to be subsumed into a giant British company.

Dasa explained that the BAe-GEC combination would make it harder to create a Europe-wide defence company, as envisaged by European leaders. It said it would now "evaluate other European and transatlantic options".

BAe says its combination with Marconi will lead to annual cost savings of pounds 275m, offsetting the costs of the merger - put at pounds 200m. Earnings per share will rise by at least 10 per cent annually after the third year, while it will have a neutral impact on earnings before items in the first year.