Boeing and Lockheed Martin Can Learn From Failed Merger

By Chris Marasco - October 19, 2012 | Tickers: BAESY.PK, EADSY.PK, LMT, BA | 0 Comments

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Cheers are the last thing you'll hear erupting from the executive offices of European Aeronautic Defense & Space (NASDAQOTH: EADSY.PK) and BAE Systems (NASDAQOTH: BAESY.PK).  Due to political tensions, the two firms have failed to merge operations, missing out on an aeronautics and defense juggernaut that would have gobbled up $90 billion in revenue in 2011.

However, a few firms have an opportunity to learn from the situation. The newly merged firm would have seen cost and revenue synergies, and its reach would have extended throughout Europe.  As a result, competing defense and aeronautics companies would have been forced to take aggressive action to protect their markets. 

Sometimes it takes a deadly scare to force action -- and the mega-merger definitely qualifies as a huge scare.  Thus, competing companies were forced to think through their competitive responses to the merger.

Personally, I believe that these response strategies could still work, even though the merger failed. What's more, they could create value for shareholders. Below are a few of the strategies the firms could have used, and how they create value.

Competitive Responses

Typically, companies follow one of three major competitive responses when rival companies want to either enter a firm’s market or engage in a large merger. 

Keep Them Out

First and most obvious, the responding companies would try to keep the new competitor out of the market.  In this case, aeronautical and defense contractors Boeing (NYSE: BA) or Lockheed Martin (NYSE: LMT) succeeded. They did not stop the merger themselves -- but it still failed.  In short, they got lucky.

Protect What You Have

Next, the companies would try to protect the market share they already have.  A newly merged company could provide a broader line of services. Both Boeing and Lockheed Martin can learn a great deal here. 

For example, they could secure long-term contracts with customers or add additional relationship managers to sales territories. Both tactics would produce stronger relationships with customers, and they could result in additional revenues from cross-selling goods and services to the same base of customers.

Land Grab Approach

Finally, the firms could take a land grab approach. They would try to quickly soak up excess market share by expanding into new areas or by adding service or product lines. This approach works well because it makes it harder for the new entity to gain additional market share. 

Lockheed Martin and Boeing can add value by quickly expanding into new territories. For example, they could target developing markets and focus investment dollars there. Also, the two firms could create shareholder value by adding compelementary products to their lines.

These strategic moves are used when a competitor threatens the marketplace and has the opportunity to snatch up huge market share. However, the strategies can add value whether a merger takes place, or whether it falls apart.

Scared Into Action

Europeans Thales and Safran agreed to a deal in optical electronics, though they have struggled to tie up their businesses before. The two firms overlap in a number of businesses and have tried to join forces , but the two could not agree to a business valuation. The EADS-BAE scare forced these two European firms to think about squeezing out a deal to link them together.

In all, the threat of an EADS-BAE merger provided an excellent reflection opportunity for aeronautics and defense firms across the globe.  In response, the firms likely created strategic plans that would have kept their market share protected and that gave them ideas for fast expansion. 

I believe that if Boeing and Lockheed Martin roll some of their competitive response strategies into their next strategic plan, they could earn additional revenues and market share through expansion.  This simple move would create shareholder value -- and that would have investors smiling.

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