SUMMARY OF
BRITISH AEROSPACE PLC AND THOMSON-CSF SA: A REPORT ON THE
PROPOSED MERGER
British Aerospace plc (BAe) and Thomson-CSF SA (Thomson-CSF)
have agreed to merge their guided weapons businesses into a joint company,
owned equally between them and to be known as Eurodynamics.
BAe leads by far in the guided weapons (GW) sector in
the United Kingdom, while Thomson-CSF is in competition in France with
two other major companies. At present the capacities of BAe and Thomson-CSF
are largely complementary.
On 19 September 1990 the Secretary of State referred
the proposals for a joint company to the MMC (see Appendix 1.1) to determine
whether they created a merger situation qualifying for investigation
and, if so, whether they would operate against the public interest. The
Secretary of State noted in a press statement at the time that concerns
arose over the ownership of Thomson-CSF's parent, Thomson SA, by the
French Government and the latter's control or influence over other defence
companies, as well as on competition grounds.
We have considered the proposed merger against the background
of current trends in the defence industry: falling demand and growing
overcapacity; increasingly sophisticated and expensive technologies;
breakdown of national markets and internationalisation of procurement
through consortia; introduction of competitive procedures for the award
of contracts by the Ministry of Defence (MOD) in the United Kingdom.
As these developments spread throughout Europe, the major participants
in the industry will increasingly have to join together to compete. Eurodynamics
is a response to those trends.
Competition in the GW market is possible at two levels:
prime contracting and subcontracting. So far as prime contracting is
concerned, we have had no evidence that the merger may be expected to
give rise to adverse effects.
There are several United Kingdom companies engaged in
subcontracting, which is an important sector of the GW business. The
issue that has concerned us is that following the merger these companies
should still be able to compete. Fears were expressed to us that where
BAe or Thomson-CSF had the capacity for subcontracting elsewhere within
their respective businesses, or within the divisions that they were transferring
into Eurodynamics, Eurodynamics would be unlikely to allow independent
subcontractors a fair chance.
We believe that the merger will introduce a new competitive
element into the market. Competition will be stimulated. It is in the
interest of BAe and Thomson-CSF themselves that Eurodynamics should award
subcontracts as competitively as possible, and should not appear to make
subcontracts impossible for independent firms to win. BAe will be alert
to ensure that it does not suffer disadvantage as a shareholder through
contracts being awarded uncompetitively. Moreover, the subcontracting
firms themselves belong to major industrial groups. They could make profitable
joint arrangements with other European contractors. The MOD also has
procedures to promote competition in the business. We conclude, on balance,
that the proposed merger would not give rise to adverse effects so far
as United Kingdom subcontracting is concerned.
As for the control or influence of the French Government,
the position is that Thomson SA, which is almost wholly owned by the
state, has a shareholding of almost 60 per cent in Thomson-CSF.
Powers exist for the Government to intervene in the management of Thomson-CSF,
should it see the need. We acknowledge that circumstances could arise
in which it could and would intervene. We do not foresee such circumstances
today. Thomson-CSF, which was nationalised in 1982, has been managed
in a commercial manner, and has rationalised its business drastically
to achieve profit. It appears to have kept the Ministries with which
it has to deal at arm's length from its day-to-day business. It has competed
strongly in the domestic and international markets, and with other state-controlled
companies as much as with private ones. The nature of its control by
the state is complicated by the fact that (like any other defence company,
publicly or privately owned) its only domestic customer is the French
MOD.
State control appears in this instance to be attenuated
in several ways. It is indirect, through the parent company, Thomson
SA. Thomson-CSF's equity capital is 40 per cent privately owned,
and quoted internationally. The state is interested in the survival of
its defence companies generally, not merely those publicly owned. The
merger is not a take-over, but a joint venture between equals. The United
Kingdom market, like the French market, would to a large extent be dictated
by a sole customer. We consider it unlikely, in all these circumstances,
that the market would be distorted by the fact of state control over
Thomson-CSF, or by the fact of state control over several defence companies
in France.
We conclude that the proposed arrangements would not
be against the public interest.
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Last Revised: June 1999
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