British Aerospace PLC and Thompson-CSF SA: A report on the proposed merger

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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 takeover, 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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