The indications last night were that the MoD would lodge no fundamental objections with the competition authorities to GEC's bid, even though the effect will be to reduce the number of naval shipbuilding companies in Britain from two to one.
In a world of shrinking defence markets, the MoD sees advantage in concentrating resources in a smaller number of UK players capable of competing with big Continental and US contractors.
Against this, the MoD has to balance its desire to see healthy competition within the UK market. The recent merger of Lockheed and Martin Marietta in the US set a precedent which the Government is keen to follow.
Although BAe controls a massive share of British defence industry - from aircraft and missiles through to Royal Ordnance rifles, guns and tanks - it has no shipbuilding or submarine-building capability.
GEC owns the only other major competitor in the field, Yarrow, on the Clyde, and also makes much of the equipment used in BAe projects. The MoD is keen to appear neutral since even a hint of preference towards either BAe or GEC would have a major effect.
The MoD has just invited tenders for the new Trafalgar II class nuclear-powered submarines from both VSEL and Yarrow, which is owned by GEC, so there is sensitivity on that point as well. If the GEC bid succeeds, the two tenderers would become one. The MoD seems to believe there may be advantages in such an outcome.
MoD sources yesterday emphasized that there was provision for 'single source contracts' in situations where effective competition no longer exists.
Recent statements suggest that the MoD would be happy to let commercial considerations take the lead in restructuring the defence industry. Roger Freeman, Defence Procurement Minister, is in favour of opening up the defence market across Europe to free competition.
A single UK warship and submarine builder could be a better competitor in the pan- European and world market than two smaller rivals.
Old arguments about the need for dispersal in defence contracting for strategic reasons no longer carry much weight. No foreign power is expected to attack Britain. Under present government and MoD thinking, if there is to be dispersion of - and competition between - defence manufacturers, it would be within Europe, not within Britain.
French submarines and major warships, for example, are built in national naval dockyards, supervised by a militarised corps. Most other European countries have one big naval shipbuilder, like Fincantieri in Italy, Blohm and Voss in Germany or Bazan in Spain. Privately, naval sources believe British warship building should be rationalised on similar lines.
Although the Government still pays lip-service to competition as a mechanism for restructuring and as a 'catalyst for improved efficiency', it seems to accept that in fields like defence no one country can do everything for itself.
MoD sources said a single major warship prime contractor would not preclude work being distributed around other British shipbuilding yards. By implication, that prime contractor might also be better placed to compete on the world market.