Outlook: Defence

THE GAME of psychological warfare being played out among Europe's defence contractors advanced on a new front yesterday. GEC put its prize piece of artillery, Marconi, up for auction whereupon the Panzer division of Germany's Daimler Chrysler Aerospace (Dasa) promptly occupied Lord Simpson's lawn. Meanwhile, British Aerospace which appears to control most of the important bridgeheads, was maintaining radio silence.

The consolidation of Europe's defence industry is a big enough challenge on its own. But with the politicians leading, like World War One generals from the back, it is made even more difficult.

The war story so far. BAe is about to merge with Dasa until GEC wakes up to the threat of being left in the cold and muscles in. BAe says it likes the look of Marconi but it does not much fancy its ugly sisters (Hotpoint washing machines, Gilbarco petrol pumps etc). GEC says it will hive off Marconi into a stand alone suitor.

Dasa's tanks start rolling. It warns that a BAe-Marconi merger could mean the death-knell for wider European defence restructuring. Dasa adds, however, that if it merges with BAe first, then it will happily bring Marconi under its wing at a later date, on German terms of course.

A Christmas truce ensues. The warring factions emerge from their trenches to look out on no man's land. Someone has even brought along a football. Hostilities resume in the New Year.

As a means of maximising value for GEC shareholders, putting Marconi up for sale is an interesting manoeuvre. The prospect of a BAe bid should underpin the price. But if a US suitor, say Lockheed, should enter the fray, then there is only upside.

The problem lies with the politics. The British and German governments want a cross-border solution, ideally a trilateral one that features BAe, Dasa and GEC.

But Dasa fears that if it is seen to be a minority partner without any great say about who gets the work and who loses the jobs, then it will not be politically palatable.

A BAe/Dasa alliance would be presented as a merger of equals (even though the equity split would be 60:40 in Britain's favour). With the inclusion of Marconi, Germany's shareholding would slip to perhaps 25 per cent, which would leave the Germans too exposed.

It is hard to believe that at this late stage, Europe's defence industry will allow itself to snatch defeat from the jaws of victory. But as many a commander has discovered, war is an uncertain business.