If 1999 was the year of the aerospace mega-merger, the first few weeks of 2000 have produced more than enough evidence to suggest that the consolidation craze is not over yet. But while Boeing's purchase of Hughes Electronics' satellite business and Thomson-CSF's swoop for the UK's Racal are both multi-billion dollar deals, together they suggest that the merger imperative has evolved beyond the pursuit of mere size.
Previous mega-deals - Boeing's takeover of McDonnell Douglas and the formation of European Aeronautic, Defense and Space (EADS) in particular - were about securing market share and attaining the sheer size needed to compete on a global scale.
Thomson, it is true, pays lip-service to the "critical mass" argument in explaining the Racal purchase, but here the term applies to one market only - UK defence contracts - and in general terms the move is very much a niche one, increasing the French company's size but in a fashion far more focused than some of the deals that went before.
In this respect the Thomson-Racal merger has more in common with the British Aerospace/Marconi deal, which saw BAe opt to boost its defence systems capability rather than add size across a number of sectors through a tie-up with Germany's DaimlerChrysler Aerospace.
The Racal move also means that Thomson is very much back in the game. Just a few months ago it seemed to have missed the mergers boat, its partial privatisation having been a messy affair with the company inheriting disparate defence electronics elements from Alcatel-Alsthom, Dassault and Aerospatiale.
But Thomson now looks to be in good shape, the Racal acquisition following the purchases of Australian Defence Industries and Shorts Missile Systems, and investment in Brazil's Embraer.
Cynics might argue that Thomson's most recent acquisitions were aimed at preventing US companies from gaining a foothold in Europe. Raytheon had appeared a likely contender for Racal and SMS. This may be true, but in reality US companies already have European operations, and in areas such as electronic warfare systems, short range/low level air-defence systems and communications, Thomson appears ready to take on the best. And though these competencies may not be as high-profile as airframing, they are profitable sectors in which to participate.
Boeing's decision to buy Hughes' satellite business is also more focused - but with an important difference.
The $3.75 billion purchase is not so much about building on an established competency, but extending the Seattle giant's reach into a new, high value arena. In that respect it is very much in line with Boeing's declared policy of exploring the potential for diversification in sectors offering better returns than simple aircraft fabrication.
The Hughes deal will increase Boeing's space revenues by 35%, including a major satellite business to its small global positioning system capability, NASA work and launchers division. It will also strengthen its hand in forthcoming competitions - such as that for the Future Communications Architecture - and could make managing the massive US National Reconnaissance Office Future Imagery Architecture programme easier, Boeing having consumed one of its team partners.
The deal also shrinks the number of US satellite manufacturers, paralleling the evolution of US fighter manufacture, where only a pair of players is available to battle through competitions.
The scope for truly large mergers is steadily decreasing as the big companies team up and the number of suitable partners shrinks. But Boeing and Thomson have demonstrated what is achievable, targeting key areas and sticking to the plan. Thomson has refused to be deflected from its niche equipment and systems focus, and Boeing - like BAE Systems - has shown that it understands the importance of establishing itself as a specialist in highly integrated, high-value equipment.
Both companies clearly believe their futures lie in high technology and integrated solutions. The rest of the aerospace industry would do well to follow their lead.
Source: Flight International
