Britain's second-biggest defence company is under pressure to move swiftly as European rivals - including British Aerospace - race to combine. A partner in the US, where GEC ranks sixth in defence electronics, would give the company access to the world's biggest market. In the US, its competitors include Lockheed Martin, Raytheon, and Northrop Grumman Corp.
"There is a strong feeling that Northrop Grumman could be broken up or could take a major partner,'' said analyst Howard Wheeldon of Matheson Investment in London. A UK alliance would "bring Northrop Grumman into Europe and opens great possibilities for exchange of technology''.
Shares in GEC - which makes Hotpoint dishwashers and payphones as well as torpedoes - rose 18 per cent on Thursday and Friday after Lord Simpson dropped strong hints of an impending deal at the announcement of the company's interim results. He said GEC was in "intense'' merger talks and expects a decision "soon".
"GEC is and will remain, primarily a defence company,'' said Matheson's Mr Wheeldon. The UK company gets about 50 per cent of its pounds 6.3bn in annual sales from defence business such as radars and satellites. The remainder comes from industrial products and telecommunications.
European companies are seeking partners to compete for export contracts as military budgets in Europe shrink. GEC, which has long talked of forming ties with its bigger rival British Aerospace, another European - or a US - competitor, is under pressure to act before the expected merger of BAe and Daimler-Chrysler Aerospace.
That merger has dimmed the prospect of the UK's two largest defence contractors joining forces. But GEC, which has held talks on and off with BAe since 1993, could join the combined BAe-Dasa later, analysts said.
GEC has said it wants to expand in the US, which accounts for one-third of its sales, making it the second-biggest market for the company after the UK. Its $1.4bn (pounds 840m) acquisition of Tracor in June doubled its US defence sales. It already makes artillery components for the US military and the electronics that control the Tomahawk cruise missiles. GEC indicated yesterday it might have to choose between the US and France. Lord Simpson said the Americans are "very, very paranoid about security arrangements'' and might see a GEC-French link-up as a threat. GEC's board would "take that into account'' when choosing partners, he added.
However, he said GEC would not name who it is talking to until it reaches an agreement early next year.
Thomson-CSF, Europe's largest defence electronics company, had long appeared a likely partner, as the UK company's GEC Marconi division - which generates half of GEC's sales - is Europe's second-biggest defence electronics maker.
GEC is linked with Thomson-CSF through a joint radar venture Thomson- Marconi Sonar. Both Thomson-CSF and GEC make communications and air traffic control systems.
"They'll choose the easiest route, and there's too much potential overlap of business sectors with the French,'' said Doug McVitie, managing director of Arran Aerospace, a Scottish aviation consultancy. "It's much more likely they'll look west than turn to France.''
While the French government has cut its stake in Thomson-CSF to below 50 per cent, its 33 per cent holding still gives it veto power over major decisions, a move that could deter GEC.
GEC would be "unlikely to enter into a deal with the French that they couldn't control,'' said Matheson's Mr Wheeldon. Northrop has said it is interested in linking up with a European defence company, providing governments allow it. "There has been some talk of transatlantic teaming, but it may be premature,'' said Ken Kresa, Northrop Grumman's chief executive officer in a September interview with the Financial Times.
The US may soften its stance on transatlantic mergers after Lockheed Martin's proposed $10.7bn acquisition of Northrop Grumman collapsed in July.
"I think GEC is prepared to wait for the Department of Defense to relax rules on foreign ownership," said Mr Wheeldon. Copyright: IOS & Bloomberg