The leading defense companies of France and Germany said today that they will merge, creating the world's third-largest defense contractor and one that could threaten America's dominance of the international arms market.

The merger between DaimlerChrysler Aerospace AG and Aerospatiale Matra SA was hailed by German Chancellor Gerhard Schroeder and French Prime Minister Lionel Jospin, both of whom were present at the signing of the deal in Strasbourg, France, near the German border.

"Faced with the creation of very large international groups, especially American ones, it became essential to combine European forces," Jospin said.

The merger was another step into the private sector for the formerly state-controlled firms, which, like many other businesses in Europe, have been shedding their government ties and becoming more competitive.

The deal follows the announced merger of British Aerospace PLC and the Marconi unit of England's General Electric Co. At one time, British Aerospace and DaimlerChrysler Aerospace held merger talks, but the two parties could not come to an agreement.

The combined Franco-German entity would have $22.7 billion in revenue and 89,000 employees, ranking third among world defense firms, behind Seattle-based Boeing Co. and Lockheed Martin Corp. of Bethesda.

"If there are only three companies in the world that make commercial aircraft, if there are only three companies in the world that make helicopters, if there are only three companies in the world that make rocket launchers or satellites, we will be among them," said Jean-Luc Lagardere, chief executive of Lagardere, the parent company of Aerospatiale Matra.

The new company, to be called the European Aeronautic, Defence and Space Co. (EADS), "will be run on a shareholder-friendly basis," said analyst Ian Hodges of Barclays Stockbrokers. "Duplicative costs can be stripped out, and they gain critical mass."

The merger places more pressure on American defense companies such as Lockheed and Raytheon Co., which have been struggling to integrate acquisitions they have made over the last few years. Earlier this week, Raytheon, of Lexington, Mass., disappointed investors by announcing a reduction in its anticipated sales and profits for 1999 and 2000.

Neither Dasa nor Aerospatiale Matra has many activities in the United States but both compete vigorously against U.S. companies for international sales.

The move is a step toward the planned privatization of Airbus Industrie, the European consortium that has emerged as a forceful competitor to Boeing in the civil aviation market. The joint entity will own nearly 80 percent of Airbus; the European firms that make up Airbus have committed to transforming it into a single publicly traded company, but the effort has not gone as smoothly as originally hoped.

"I would imagine Boeing would be quite frightened," said Clive Forestier-Walker, an analyst with Charterhouse Securities in London. "Airbus has been doing quite well recently. Now that 80 percent of it will be in one company, there is more scope to drive efficiencies."

Left isolated by the planned Dasa-Aerospatiale merger is British Aerospace, which owns 20 percent of Airbus. But the British have sought alliances with American aerospace firms, and they are part of the Lockheed team building the F-22 supersonic fighter.

The Spanish defense group Casa, which now holds 4 percent of Airbus, already was in the process of merging with Dasa and will join the new conglomerate.

At the news conference today, Lagardere invited British Aerospace and other companies to join in the new alliance. British Aerospace did not respond directly but said in a statement that it welcomed the merger and said it "creates a stronger partner and offers the potential to enhance the competitiveness of the joint ventures and the many collaborative programs in which British Aerospace is involved."

The merger is expected to be approved by European regulatory authorities, but the two partners will have to reconcile conflicting cultures and styles.

Analysts pointed out, however, that the two firms already cooperate in almost every dimension of what they do, from Airbus to space satellites. The combined company will have dual headquarters in Munich and Paris.

Sizing Up Defense

A merger of DaimlerChrysler Aerospace and Aerospatiale Matra would create the world's third-largest defense company. Here are the top five, by sales:

Revenue, in billions

Boeing $56.1

Lockheed Martin 26.3

DaimlerChrysler Aerospace / Aerospatiale Matra (merger pending) 22.7

Raytheon 19.5

British Aerospace / Marconi Electric Systems* (merger pending) 13.0

*A unit of Britain's General Electric Co.

SOURCE: Hoover's, Bloomberg News