McDonnell, Boeing in Talks to Combine
Boeing Co. and McDonnell Douglas Corp. are in the early stages of talks on combining segments of their operations, or undertaking a full-blown merger that would turn the aerospace world upside-down, industry sources said Thursday.
An outright merger, which experts said is highly uncertain, would create a global aerospace giant with annual sales of $35 billion and a command of such diverse markets as combat airplanes, piloted spacecraft and commercial jetliners.
Boeing dominates the world’s commercial aircraft market, while McDonnell is one of the world’s biggest defense contractors and also the only other U.S. manufacturer of commercial jets. Any merger would thus face intense scrutiny from antitrust authorities--but might also yield a U.S. company better positioned to compete with Europe’s government-backed Airbus consortium and emerging Asian rivals.
Boeing and McDonnell, which trace their origins to the earliest days of aviation, are among the most important U.S. exporters and serve as economic linchpins in such diverse regions as Southern California, Seattle, St. Louis and Philadelphia.
A merger would have major implications for the Southland’s battered aerospace sector, but experts were sharply divided on whether it would be a boon or a bane for major facilities such as Douglas Aircraft’s Long Beach airplane factory and McDonnell’s Huntington Beach space systems facility. The Boeing-McDonnell talks come after several years of fast-paced merger activity in the aerospace industry, where competitors have been joining forces to compete for reduced Defense Department dollars in the post-Cold War era.
The biggest such merger so far came only last year, when Lockheed Corp. and Martin Marietta Corp. merged in a $10-billion deal to form Lockheed Martin Corp. A merged Boeing-McDonnell would easily eclipse Lockheed Martin as the biggest U.S. aerospace firm.
The talks, being held in New York, do not involve the chief executives of the two firms, but rather other officers and attorneys--suggesting that a swift, bold deal is not at hand. The two companies did not deny they are holding talks, but said that as a matter of policy they never comment on merger speculation.
The close strategic fit of the two companies, particularly in commercial airplanes, was lauded by securities analysts and aerospace experts.
“It is too early to predict, but the possible outcomes are so interesting that the companies will work hard before they give up on these discussions,” said analyst Joseph Campbell of the investment firm Lehman Bros. in New York.
McDonnell President Harry Stonecipher has broadly hinted that his firm, cash-rich after a run of highly profitable quarters, is looking for the right deal--and that the only kind of deal that counts is a big deal.
Investors were clearly pleased. McDonnell shares jumped $4.375 a share, to close at $90.625, while Boeing rose $1.875 to $75.875 in trading on the New York Stock Exchange.
Stonecipher and Boeing Chairman Frank Schrontz have been close friends for at least 20 years, going back to when Stonecipher was selling jet engines for General Electric Co. and Schrontz was his customer at the Pentagon.
Since so little is known about the talks, the value of any future deal is highly uncertain. But analysts expect McDonnell shares would soar to more than $100 a share if Boeing makes a direct acquisition, resulting in a transaction valued at more than $11 billion.
Possible antitrust problems loom large over any deal. A merger of the firms’ commercial aircraft lines, combining Boeing’s 55% worldwide market share with McDonnell’s 10%, would give the surviving entity a 65% share--and would reduce the number of international competitors to just two, the merged company and the European consortium Airbus Industrie.
An antitrust expert in Washington who declined to be identified said federal regulators will have a hard time blessing any deal that increases one company’s hold on a market to nearly 70%. But one attorney familiar with the two companies said that if the merger talks result in a deal, it would ultimately win federal approval. The firms’ military businesses do not compete with each other, he noted, and they will assert that the commercial lines should be exempted because of it is part of a “sick industry.”
Under the sick-industry argument, antitrust rules would be waived because the effect on the U.S. economy, jobs and technology would be worse without a merger than one that may seem anti-competitive.
C. Donald Scales, an aerospace expert at the consulting firm A.T. Kearney, said a Boeing and McDonnell merger would represent the next logical step in the consolidation of the industry.
Moreover, Boeing and McDonnell are facing increasingly stiff competition from Airbus, which has won significant market share from McDonnell and forced Boeing to cut its prices.
Asian firms, meanwhile, are demanding and winning important subcontracts on new aircraft programs--including persuading McDonnell to allow them to build the nose of its new MD-95 100-seat jet.
Concerns about work moving offshore is a key issue in a strike now under way involving about a third of Boeing’s 105,000 employees.
But for all the concern triggered by the talks, many analysts said they were doubtful that the discussions would lead to a total merger.
Wolfgang Demisch, an analyst at BT Securities in New York, said he rated the likelihood of a merger at 10%, and he rated a deal of much smaller scope at less than 50%.
The effect of a deal on the Douglas’ huge Long Beach operation, whose prospects have actually improved in recent years as the firm has cut its costs and managed to earn small but continuous profits, is uncertain. If Boeing were to own the unit, it almost certainly would elect to cut operations redundant with those in Seattle, possibly including product support, administration and engineering.
Ultimately, some experts believe that a merger would be a death sentence for the entire Long Beach operation. But other experts said Boeing might want to keep the plant open as aircraft sales expand.
Any deal would also have broad ramifications for the Department of Defense.
Boeing ranks well down on the list of defense suppliers, posting $4.7 billion in military sales last year, while McDonnell is the second-largest Pentagon contractor with revenue last year of $7.8 billion. The roles are reversed in commercial aircraft, where Boeing had sales of $16.8 billion and McDonnell $3.2 billion.
And whatever federal antitrust regulators might decide, the deal will have a hard time politically. When McDonnell attempted to sell a minority stake in Douglas Aircraft to Taiwan interests three years ago, it triggered congressional hearings and a loud political outcry by the California congressional delegation.
Vartabedian reported from Washington and Peltz from Los Angeles.
* LOCAL IMPACT: Full-scale merger may hurt area’s aerospace industry. D1
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