Raytheon talks may herald US tie-up

McDonnell Douglas is believed to be in talks with Raytheon about combining their aviation and defence businesses or even possibly an outright merger, which could herald one more big consolidation of the US defence industry.

A fusion of the two companies would generate a giant of the same scale that was formed by the recent mergers of Lockheed and Martin Marietta, to create Lockheed Martin, and Northrop and Grumman, now combined as Northrop Grumman.

The courtship of Raytheon comes on the heels of McDonnell Douglas' brief but much-vaunted consideration of marriage with the Boeing Company last year. The St Louis-based company is said to consider the prospect of merging with Raytheon just as significant as a Boeing tie-up would have been.

Quoting sources close to the talks, the Wall Street Journal said that the talks had been code-named "Project Storm" and that Raytheon had been tagged "Rain". The sources insisted, however, that the discussions are in their early stages and only moving very slowly.

A full-blown merger of the companies is considered a relatively unlikely prospect, if only because the corporate cultures of the two are so different. Raytheon is also a much more diversified company than McDonnell Douglas, with highly important construction and aviation units. Its core business remains defence, however.

Were a full combination to be attempted, it would create an enterprise with more than $26bn (pounds 16.7bn) in annual revenue. It would be valued at about $9.89bn based on the current market capitalisation of McDonnell Douglas. While Raytheon is smaller in revenue terms, its market capitalisation is slightly higher at $10.75bn at current prices. Shares in both companies rose slightly yesterday on reports of the talks.