The UK's British Aerospace (BAe) and General Electric Company (GEC) are reported to be considering a a mega-alliance.

This follows recent reports that GEC could become a third player in a proposed $21bn (£14bn) defence merger between BAe and Germany's DaimlerChrysler Aerospace (Dasa).

GEC said on Monday that it would not comment on the rumours.

However, the speculation has seen the shares of both the UK companies climb. By 1000 GMT, BAe had climbed 8 pence or 1.6% to 517.5p while GEC gained 1.4% to 534p.

BAe and Dasa were said to have been in talks for several months over a full merger and were thought to be close to making an announcement earlier this month.

The heads of BAe and GEC, Sir Richard Evans and Lord Simpson, are now believed to prefer a full merger between their two companies which would create a £23bn group.

They are also reported to be examining the possibility of injecting GEC's Marconi Electronics arm into an enlarged BAe.

GEC has confirmed that it is in merger talks with other defence companies, but will not say whom it is talking to.

A spokesman for GEC said the company had been in "intense discussions" with several major participants in the global defence industry and would "still expected to make a decision on its future strategic course soon."

The spokesman was unable to confirm or deny any of the reports.

BAe declined to comment.

Government angst

Any deal between GEC and BAe could be blocked by the UK Government which is believed to be unhappy about the prospect of a bi-lateral merger.

Ministers are said to prefer a three way deal involving BAe, Dasa and GEC's Marconi arm, but some industry analysts doubt the viability of such a move because of the problem of reconciling the demands of three sets of investors.

The pros and cons

A GEC merger with BAe would see the former's huge cash resources combined with latter's expertise in prime contracting and aircraft platforms.

The disadvantage of a full two-way merger for BAe is that it would give GEC shareholders a 60% stake in the new company, despite BAe having the more valuable business in the group's core area.

Neither would BAe be interested in any of GEC's other activities.

A deal injecting Marconi into BAe would create the problem of deciding how big GEC's stake would be in the new group.

Consolidation

Europe's defence sector is trying to consolidate in the face of stiff competition from the top three US players, Boeing, Lockheed Martin and Raytheon.

A year ago, European governments called on industry leaders to overcome their difficulties and create a pan-European aerospace and defence company (EADC).