Bid Dropped for Stake in McDonnell : Aerospace: Taiwan firm’s action deals a serious blow to U.S. firm’s plan to build a new generation of jetliners.

Taiwan Aerospace Corp. said Monday it is withdrawing--at least for now--a proposal to buy a major stake in McDonnell Douglas’ commercial aircraft business, dealing a potential major blow to the U.S. company’s future as a builder of passenger jets.

Monday’s action marked a sharp departure from the original plan unveiled last November, in which Taiwan Aerospace would pay McDonnell up to $2 billion for a 40% stake in its Long Beach-based commercial jet business.

Instead of becoming a major investor in the commercial operation, the Taiwan company now is offering to invest only 5% to 10% in the business while helping McDonnell obtain credit to finance production of 20 new MD-12 jetliners. Taiwan Aerospace officials also said they would hold off for two years before considering a bigger investment.

But McDonnell executives have said repeatedly that they need a major cash investment from abroad to pay for the MD-12s, new-generation jetliners that would be built in one of nine potential sites outside California.

McDonnell officials reiterated this posture in a statement Monday, saying they will “insist that partners take an equity position.” But they did not specify how much of a stake they would require.

Despite Monday’s developments, John McDonnell, chairman of the St. Louis-based aerospace firm, was optimistic about the Taiwan deal, saying he “remains pleased with our progress to date.” He added that the firm is looking forward to further negotiations for “the formation of a global enterprise.”

But investors judged the new proposal harshly, bidding McDonnell stock down $4.635 a share, or nearly 10%, in New York Stock Exchange trading Monday. The shares closed at $43.50, off 46% from the peak of $80.50 that McDonnell shares traded at last fall when the Taiwan deal was unveiled.

Wolfgang Demisch, an aerospace analyst at UBS Securities, said the latest proposal by Taiwan Aerospace appears not to provide McDonnell with enough capital to undertake development of the new MD-12 jetliner or to provide a sharing of risk in the project.

“If this is the Taiwan proposal, it is not one which is going to result in an airplane,” Demisch said.

However, the Taiwanese proposal could merely be a negotiating ploy, said David R.C. Chu, director of the Taiwan government’s aviation and space industry development committee. “After discussions with McDonnell Douglas, it’s possible that another plan may emerge,” Chu said.

McDonnell Douglas, the nation’s largest defense contractor, has suffered from declining Pentagon spending and hopes to compensate by remaining a strong player in the commercial aircraft business. But McDonnell, which ranks as the world’s third-largest commercial jet manufacturer, has lost market share to both Boeing and Airbus Industrie in recent years.

McDonnell’s Long Beach operation has laid off thousands of workers during the past several years. At the same time, the company’s C-17 military transport plane has been plagued by cost overruns and other problems.

Under the new proposal, Taiwan Aerospace would head a consortium of Taiwanese investors who would provide a letter of credit to go toward purchase of 20 MD-12 jumbo jets, company officials said at a meeting Monday in Taipei.

McDonnell would reciprocate by having Taiwan Aerospace and its partners produce MD-12 wings and fuselages.

While the memorandum of understanding signed last November called for Taiwan Aerospace to purchase up to 40% of the Douglas Aircraft division, the new proposal has both sides retaining nearly full ownership of their own companies for the short term.

“If you can achieve all of your goals without giving up ownership of your company, why not do it?” said Taiwan Aerospace President Denny R. S. Ko. He said the new proposal plan should not be viewed as a setback for McDonnell because it would allow the aircraft maker to get the cash it needs to develop the MD-12, provide a lower-cost labor force and guarantee a market for the new plane.

“If you believe in your company, you want to give up the minimum possible,” Ko said. “If you don’t believe in your company, you want to sell off as much as you can.”

Although Taiwan Aerospace’s board of directors expressed support for the new plan at a meeting on May 14, Ko said, the company has not formally presented the plan to McDonnell.

Taiwan Aerospace Chairman Earle J. S. Ho insisted, however, that the scaled-down proposal should not catch McDonnell by surprise. “This is not a new concept,” he said. “In essence, they understand that we have had this idea.”

Under the new proposal, Taiwan Aerospace would consider acquiring only 5% to 10% of McDonnell’s commercial aircraft business, Ko said. But it might purchase up to 40% within two years if the MD-12 has a positive reception in the marketplace.

But the purchase of the 20 MD-12 planes would be contingent on McDonnell first getting orders for about 27 to 30 other MD-12s, Ko said.

Taiwanese investors would set up a leasing company to purchase the 20 planes from McDonnell as well as a manufacturing company to produce the MD-12s’ wings and fuselages. The cost of the local investment would be $2.5 billion, Ko said.

The new plan may help to alleviate concern by Taiwan Aerospace’s potential local partners about the risk of directly investing in McDonnell.

“If the MD-12 has problems, then we can use the new company to find other partners such as Airbus, Boeing or others,” Ko said. “This will increase investor confidence.”

Citing McDonnell’s previous financial difficulties, a government-sponsored evaluation of the proposal last month favored the deal but said there were risks involved when working with McDonnell.

Taiwan Aerospace is trying to round up private industry support for the project. At Monday’s meeting, company officials met with officials from 60 companies, including representatives from the airline, electronics and machinery industries.

Taiwan Aerospace hopes to form a negotiating task force with other private sector companies in the next few weeks to begin talks with McDonnell.

Special correspondent Einhorn reported from Taipei and staff writer Vartabedian from Los Angeles.