The Coming Week in Europe: Dasa-Aerospatiale Merger Cranks Up Pressure for Consolidation - TheStreet

The Coming Week in Europe: Dasa-Aerospatiale Merger Cranks Up Pressure for Consolidation

All eyes are now on British Aerospace amid speculation of it partnering with the Franco-German firm or looking across the Atlantic.
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The merger between Germany's

DaimlerChrysler Aerospace

, or Dasa, and France's

Aerospatiale-Matra

may create the world's third-largest aerospace concern, a fact that was widely reported on Thursday.

But don't expect the new company to hold that ranking for long.

The merged entity, to be identified by the awkward moniker

European Aeronautic, Defence and Space Company

, or EADS, will be a defense behemoth and European champion with 89,000 employees and combined sales of 21 billion euros ($22.7 billion). The deal, however, is destined to be a prelude to greater consolidation, the result of which could be alliances that surpass the Franco-German linkup in size and importance.

Expectations of more deal making, of course, may prompt some traders to poke around Europe's bourses looking to get ahead of the next takeover target or mover-and-shaker, although that may not be enough to support overall indices in the wake of New York's dramatic fall on Friday.

The conventional wisdom sees continental consolidation forcing BAe to join with the Franco-German giant or looking across the Atlantic for the comfort of an American company, such as

Lockheed Martin

(LMT) - Get Report

or

Raytheon

(RTN.A)

.

After BAe spurned Dasa for a linkup with

Marconi Electronics

, the defense arm of U.K.'s

General Electric PLC

, earlier this year, the Germans said any possible merger with the British was out of the question. Now that Dasa has the French on its side, BAe is faced with the unpalatable proposition of coming in as the junior player.

Regardless of whether the British seek an American-speaking partner or opt to join their aerospace cousins across the Channel, the sector will certainly continue to spark investor interest in the coming week.

That's because not only did EADS announce the company would seek a public listing in the first half of 2000, but also the consolidation should help solidify the convoluted nature of the Airbus consortium, which is split 80/20 between EADS and BAe. "The deal represents a major step forward for the negotiations regarding the incorporation of Airbus," says Camilla Darwin, an analyst for

J.P. Morgan

in London. "There is

now strong motivation for both EADS and British Aerospace to come to an agreement." J.P. Morgan has an investment banking relationship with

DaimlerChrysler

(DCX)

.

Away from the equity markets, economists will watch to see if German business confidence, as measured by the Munich-based

Institute for Economic Research

, will continue its recovery for the fifth month in a row. The results will be released on Wednesday, and there is some question whether the poor showing of Chancellor Gerhard Schoeder's

Social Democratic Party

in regional elections will raise concerns about passing much needed spending cuts and reforms, thereby hurting confidence in Europe's largest economy.

Toward the end of the week, Spain and France will report industrial production figures for August. Although Spain will be first in publishing figures on Thursday followed by France on Friday, output from both countries is expected to provide further evidence of the continent's economic rebound.

What's still unclear is whether the difficulty people may have pronouncing European Aeronautic, Defence and Space Company will have a negative impact on that rebound.