Outlook: This was the best defence deal going

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The Independent Online
TONY BLAIR doesn't much like the BAe-Marconi merger, and nor did the market greet it with unbridled enthusiasm yesterday. Even so, there are compelling reasons for believing this to be the best deal either company could have done, for shareholders, for employees and, for that matter, for the country.

The Prime Minister frets that the lack of a cross-border element to the merger will make it harder for him to show off his pro-European credentials as he cuddles up to other heads of government on the Continent. He worries that BAe's "UK first" policy will slow the process of European defence integration.

But there are no prizes for guessing who would have borne the brunt of any job cuts in a cross-border deal. The French talked boldly about slicing pounds 500m off the cost base of a merged Thomson-Marconi business. Given that it is 20 per cent more expensive to employ someone in France and even more costly to sack them, it is obvious where the axe would have fallen.

Perhaps that is why the unions, amongst others, leapt to the defence of BAe when not so long ago this would have been the sort of deal that had them manning the barricades.

The plunge in BAe's share price will undoubtedly have given Sir Dick Evans pause for thought yesterday. Some of the fall is explained by deal fatigue, and the premium is certainly fancy - Marconi is departing GEC on an exit multiple of 27 times earnings. But again the reaction was probably overdone. Had BAe allowed Lockheed or Thomson to snap up its biggest supplier from under its nose, the damage to shareholder value might have been far greater.

Deprived of the opportunity to play GEC and BAe off against one another, it is the Americans who have most to worry about as far as the European field of battle is concerned. As for DaimlerChrysler Aerospace, it can fulminate all it wants about a horizontal merger with BAe being dead in the water. But when it sees how poorly its own shareholders might be served by joining forces with its state-influenced French counterparts, who would bet against it suddenly finding an ally in BAe again?