GEC is to buy the Edinburgh-based Ferranti Defence Systems Group as

well as part of Ferranti International's assets in Italy.

The decision, announced after talks held in considerable secrecy,

caused widespread astonishment, not least in the Commons, where Labour

demanded a referral to the Monopolies and Mergers Commission.

The Department of Trade and Industry said the takeover came within the

realms of the Fair Trading Act and would be reviewed by the

Director-General of Fair Trading. It would then be referred to Trade and

Industry Secretary Mr Nicholas Ridley who would make any decision on


The cash payment of #310m will transform the fortunes of the Ferranti

group, which lurched into a financial crisis when an estimated #215m was

milked from its American partner International Signal Corporation via

fake contracts. But there is considerable overlapping of defence

interests between Ferranti and GEC's Marconi subsidiary -- leaving the

future of Ferranti's 6300 Scots employees unclear.

The announcement came after Ferranti shares rose by 5p to 34p on news

that Ferranti Defence Systems Group was set to win a share of the #2

billion radar contract for the European Fighter Aircraft. Shares had

tumbled in recent months from a high of 113p after the fraud revelation.

It emerged that Ferranti's share of the radar contract could be less

than #200m, but even that was considered good enough for GEC almost to

double the figure bid by French interest Thomson CSF, which pulled out

last week. A spokesman said: ''This is why we got such a good price from

GEC. The deal was not conditional on the order, but obviously it made

Ferranti more attractive to GEC.''

The discussions with GEC were firmed up only in the past two weeks by

Ferranti chairman Sir Derek Alun Jones. He said the agreement would

greatly strengthen the financial position of the group. ''Ferranti

International will be less dependent on military markets, and will be

one of the UK's largest systems software houses as well as having

attractive businesses in electronic products and weapons systems.''

The remaining Ferranti operations include industrial electronics, with

headquarters at Dalkeith, and with operations also in Livingston and

Dundee as well as in Yarmouth and the US. The important computer systems

are world leaders in software while there is a significant

instrumentation division as well as dynamics which is a turnkey guided

weapons supplier.

Ferranti finance director Charles Scott said the transaction would be

good for employees in Scotland and bring a powerful parent to the

business. He said that if the fighter contract were awarded it would go

to Ferranti Defence Systems. The Ministry of Defence has already said

that Ferranti is the most favoured company.

Defence Procurement Minister Mr Alan Clark, in the Commons, said the

announcement would provide reassurance to concerns expressed by the

German Ministry of Defence over placing the contract with Ferranti,

given its financial difficulties.

He said: ''The MoD welcomes a solution which will maintain the future

of Ferranti Defence Systems as an important and competent supplier. The

companies informed the MoD that discussions were taking place and of the

benefits which they believed should accrue from the bid.''

There are 6300 employees in the division, most in Edinburgh with the

remainder at Bellshill in Lanarkshire. It produces a wide range of

systems for the Ministry of Defence. In the year to March, it brought in

almost #20m of the #21.4m before tax earned by the businesses being sold

to GEC and amounted to 30% of the total Ferranti order book.

However, the future of the Scots workers was unclear. GEC said it was

not yet in a position to issue a statement. Three of Ferranti Defence

Systems' five divisions are in direct competition with GEC products --

cockpit head-up displays for flight information, navigation and guidance

systems, and radars. GEC may keep its existing subsidiaries as

individual entities or merge the operations.

Dr Gavin Strang, Labour MP for Edinburgh East, said the deal should be

supported provided the management structure was right. This had to mean

that Ferranti Defence Systems would incorporate GEC's other airborne

radar interests. ''We would welcome some hard commitment from GEC that

they are going to prove they are prepared to invest heavily in the

long-term future of the Edinburgh-based enterprise.''

Mr James Lupton, of Ferranti's merchant bankers Baring Brothers, said:

''We have obtained a premium price for a premium asset.'' The deal

provided a ''substantial injection of capital'' to the firm enabling

Ferranti to repay a considerable amount of debt. It also means that

plans for the rights issue due to be launched on the Stock Market within

the next 10 days have been abandoned.

The acquisition of Ferranti Defence Systems Group is believed to have

had the prior blessing of the Ministry of Defence and the Government is

expected to be an enthusiastic supporter of a major British company

maintaining a major presence in the defence sector.

In the Commons, Shadow Defence Secretary Mr Martin O'Neill said:

''This amazing news, coming immediately after the clinching of the radar

deal, suggests that the Government was working as much for GEC as they

were for Ferranti.

''Given that this is now the second major acquisition by GEC following

the Plessey deal, one can only wonder whether this latest one will be

referred to the Monopolies and Mergers Commission and whether it will

have an effect on the implementation of the radar contract.''

Mr O'Neill said that one of GEC's subsidiaries was likely to be a

sub-contractor to the German competitor for the radar contract. ''The

relief expressed by all connected with Ferranti may well have been


The GEC takeover was met with astonishment by union leaders who voiced

fears for the future. GEC, through its Marconi subsidiary, has been a

major competitor with Ferranti in defence work.

Mr Kenny Barnes, joint shop stewards' convener in Edinburgh said:

''There are a considerable number of questions about the way it is going

to operate and fears of rationalisation must come into it very strongly.

There is overlap of interests and that must worry us.''

Mr Jim Muirhead, chairman of the Manufacturing, Science and Finance

union at Ferranti, said: ''We do have a lot of competing interests and I

would be concerned about what GEC would be proposing, especially with

regard to the Scottish end of things.''