Adam Collins, analyst at stockbrokers Merrill Lynch, commented: "Chief executive George Simpson is leaving soon [for GEC]. Completing a merger before he goes would be too difficult. I don't believe it is going to happen. A more likely scenario is a deal on brakes."
On paper, the merger looks fine. It would create a pounds 3bn-plus business able to match the financial power of other global players. "Ultimately, car makers will rely on fewer component suppliers," said one analyst.
"Car companies will want to establish plants around the globe in currently undeveloped markets. They would expect their suppliers to be of sufficient size and financial strength to set up plants alongside to meet their needs."
Lucas only just makes it into the top 20 of the world largest automotive component suppliers. A merger with Varity would catapult it into the top 10.
But a stumbling block could be the price. Annual sales at Lucas total pounds 3bn while Varity's are pounds 1.6bn, although the latter generates much higher margins. As a consequence, its shareholders could demand a premium.
Lucas has four automotive businesses, which could neatly dovetail with Varity's four.
Braking systems provide the greatest opportunities for synergy. Varity controls around a quarter of the US market and has good ABS (anti-locking braking systems) technology, while Lucas is the world's largest supplier of brake "foundation" com- ponents such as disks and brake pads.
Diesel engine "know how" and automotive electronics systems could also be put together relatively easily.
But a merger would cast a shadow over the future of the Lucas aerospace operations that make flight controls and cargo-handling systems. A Lucas spokesman insisted: "Aerospace isn't for sale. It is a global player in its selected sector and has good and improving margins."
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