U.S.-European Defense Mergers Likely, Official Says

WASHINGTON â€”  Europe’s drive to develop new weapons at lower cost will spark a “significant numberâ€� of mergers and ventures between U.S. and European firms within months, a top Pentagon official predicted Wednesday.

The statements pushed Northrop Grumman shares up 8% on speculation that the No. 5 U.S. defense contractor could be purchased by a European company. The shares rose $5.50 to close at $74.31 in trading of 1.4 million shares, more than four times the three-month daily average.

Undersecretary of Defense Jacques Gansler said NATO’s air war in Yugoslavia highlighted a big U.S. lead over Europe in “smart� arms, military communications and transportation, and the need for cross-Atlantic cooperation while strictly protecting secrets.

“I think it’s clear that the Europeans got that message loudly,� Gansler, who heads military acquisition and technology issues at the Defense Department, told reporters in an interview.

“My personal guess would be that you would start to see a significant number of these [mergers] within months rather than within years,� he said.

Gansler said the Pentagon is even willing to consider takeovers of such U.S. defense giants as Northrop Grumman, General Dynamics and TRW by European firms, but would demand protection of technology from potential foes.

Northrop Grumman built the radar-evading B-2 stealth bomber, one of the world’s most advanced weapons. Since Lockheed Martin’s failed attempt to purchase Northrop last year, there has been speculation that Century City-based Northrop may be a takeover target of a European defense company. Northrop declined to comment on the speculation.

“It’s been clear [that] of all the large contractors, the only one that could be potentially bought out would be Northrop,� said Sam Pearlstein, an analyst at ING Baring Furman Selz, who has a “buy� rating on Northrop.

Gansler declined to provide details on possible international mergers or ventures but confirmed that the Pentagon had discussed the issue with European governments as well as executives of such firms as British Aerospace, France’s Aerospatiale and Thomson-CSF, and DaimlerChrysler’s aerospace unit.

“There are now lots of discussions going on . . . in terms of U.S. and European, or even Asian, firms--dialogue about potential teaming arrangements, joint ventures and certainly mergers,� Gansler told reporters.

“I think there is a growing awareness within Europe of the need for restructuring. Because of the activity in America, the Europeans have become much more active in looking for possible mergers and acquisitions. They are happening literally daily.�

He stressed that mergers and other cooperation would be driven by market need. He added that governments and firms must protect secrets from enemies and make sure competition is not cut so sharply that weapons costs get out of control.

The Pentagon recently quashed a $1.8-billion takeover deal by Woodland Hills-based Litton Industries and Newport News Shipbuilding, as well as a similar move by General Dynamics to take over Newport News, because of concerns over competition in military shipbuilding.

Executives at Dasa, DaimlerChrysler’s aerospace unit, said Pentagon officials have become more open to transatlantic defense combinations and are willing to give European companies greater access to U.S. technology.

The company said Deputy Defense Secretary John Hamre indicated the liberalization of U.S. policy in a recent meeting with Manfred Bischoff, Dasa’s chief executive.

“The American government gave the signal that it would support the idea of transatlantic cooperation and the opening of the American market to European defense contractors,� said Rainer Ohler, a Dasa spokesman.

Raytheon Class B shares also rose on the prospects of a transaction with a European aerospace company, gaining $3.94 to close at $74.94.