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EADS-BAE merger could pressure Boeing’s defense business: analyst

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Updated: October 15, 2012 9:53AM

If aerospace and defense contractors BAE Systems and Airbus owner EADS combine, they would dwarf the size of the industry’s largest company: Chicago-based Boeing Co.

Such a merger, being discussed by London-based BAE and Netherlands-based EADS, could pressure Boeing’s defense business, but probably not its commercial airplane business, according to analysts.

Boeing, now the biggest aerospace and defense company in the world with 2011 revenues of $64.3 billion, would become No. 2 — far behind that combo, which would have total revenues of $99.1 billion.

Boeing would feel the impact of a merger on the defense side of its business, said Oppenheimer & Co. Inc. aerospace and defense industry analyst Yair Reiner.

Boeing’s defense business generated nearly $32 billion in revenues last year.

“What this really does is give the combined European entity a better footprint here in North America and I think potentially allows the legacy EADS business to find more success with the U.S. Department of Defense,” Reiner said. “That’s been a stated goal of EADS for a while. BAE already has more of a footprint and better lines of communications and relationships with the Department of Defense” than EADS, he noted.

BAE was the U.S. government’s ninth largest contractor in fiscal 2011 at $7.3 billion in sales, and EADS ranked 100th, at $684 million, based on a Bloomberg Government study of the top 200 suppliers. Boeing was the U.S. government’s second-largest contractor in fiscal 2011, at $22.1 billion in sales, according to Bloomberg News.

Morningstar analyst Neal Dihora doesn’t see a merger hurting Boeing.

“I don’t think it impacts their airplane business whatsoever because BAE doesn’t bring anything in the commercial aerospace space, so that’s a net neutral, and in the defense space, BAE has defense business in the U.S. and internationally, and they already compete with Boeing,” he said. “Most of EADS’ business is not in U.S. markets, and they already compete with Boeing for different projects. So it think it’s almost like a nonevent for Boeing.”

Commenting on the merger possibility Wednesday, Boeing Chief Executive Officer Jim McNerney said, “I don’t see this as something that is going to threaten us fundamentally. It does reflect a global consolidation that is beginning to happen…And the entity when it’s put together does look a lot more like us.”

McNerney, who was speaking at a Council on Foreign Relations event in Washington, D.C., added he hasn’t studied the potential merger and declined further comment.

“Long-term, I think clearly it will create a stiffer competitor not just for Boeing, but for all the large U.S. prime contractors,” Reiner said Thursday.

“Over the short-term, what often times happens with these type of combinations is that the companies that consolidate wind up having to be much more internally focused and think a lot more about how to consolidate their businesses and work together and a little bit less about how to look outward and find incremental sources of business. So near-term the combination may make things a little bit easier for Boeing and the other U.S. defense primes.”

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