View from City Road: BAe link-up with GEC only a matter of time

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The Independent Online
In all the confusion about GEC and British Aerospace, one thing is clear. One day the two companies will come closer together, forming a defence business able to compete effectively with the likes of Thomson- CSF and McDonnell Douglas.

Against the background of falling defence sales at home - underlined by the publication yesterday of the Defence White Paper - and the expansion of powerful combinations such as Daimler-Benz overseas, the logic of a merger is compelling.

But the time is still not right. Not so many months ago Lord Weinstock, managing director of GEC, and John Cahill, chairman of British Aerospace, were holding friendly chats at Stanhope Gate about a merger of their defence interests. But yesterday morning they told the world that these talks had ended.

Can premature disclosure in a Sunday newspaper really be responsible? It is hard to believe that the formation of a strategic alliance of this importance could be derailed so easily. If the two sides had been serious they could have simply confirmed they were in preliminary talks and continued them behind closed doors.

As it is, both sides come out of the saga badly. It looks very much as if British Aerospace was looking for a pretext for bringing the talks to an end and the weekend leak filled the requirement. And it appears that GEC, which was far keener on a merger, was disappointed by British Aerospace's response. Lord Weinstock's grand vision has once again been blotted out for the time being.

Since Mr Cahill joined the aerospace company its fortunes have improved but they have yet to be transformed. It has formed a joint venture with Taiwan Aerospace for regional aircraft, won extra orders from Saudi Arabia for Tornados and seen the introduction of tight financial controls. But much more work at the sprawling conglomerate remains to be done.

This has been reflected in its share price which, while well up from its September low of 98p, is still only 6p above the 1991 rights price of 380p. Investors who dug deep into their pockets then have hopes of higher rewards.

Against this background, Mr Cahill could be forgiven for thinking he is not yet in a powerful enough position to negotiate with Lord Weinstock on equal terms. Unlike British Aerospace, GEC has come through the recession with only a scratch to show for it.

Mr Cahill is confident, however, that he will have the upper hand in a few years' time. To the extent that GEC has nothing like the recovery potential of British Aerospace, he is right. GEC's shares tend to lag behind the rest of the market during an upturn, whereas Aerospace has plenty of upside.

Meanwhile, talks on individual projects such as radar for Tornados continue.

These ventures may multiply so that a full merger of their defence interests will become feasible without fuelling such controversy.

But the weekend upset means that Lord Weinstock, who is 68, may have to observe the rationalisation for which he has campaigned so long from the sidelines - in retirement.