Boeing-McDonnell Merger Talks Snag
Secret merger talks between McDonnell Douglas Corp. and Boeing Co. have hit a major roadblock, but the two aerospace giants are still negotiating and a potential deal is not dead, industry sources said Tuesday.
The talks, which first surfaced two months ago, bogged down over price and the roles that senior McDonnell executives would play in the merged company, according to sources who asked not to be identified.
The Wall Street Journal reported Tuesday that the two companies had halted their exploratory merger talks. But a source familiar with the talks insisted that the negotiations have not ended and that neither company has walked away from a potential deal.
“I don’t think it is dead,” said another official familiar with the discussions. “Anything that attractive is going to be back again.”
Spokesmen for both companies declined comment.
If such a marriage occurred, it would create the largest aerospace firm in the world, with a full range of military and commercial aircraft, annual sales of $35 billion and 180,000 employees. Boeing, based in Seattle, is the world’s largest builder of commercial jetliners. McDonnell, based in St. Louis, is one of the nation’s largest defense contractors.
The sources said the two firms had retained six investment bankers and advisory firms for the potential deal, led by CS First Boston for Boeing and J.P. Morgan & Co. for McDonnell. Besides a full merger, McDonnell has also discussed the sale of certain divisions with Boeing.
But among the stumbling blocks to a merger is the job that McDonnell Chief Executive Harry C. Stonecipher would get in the merged entity. Stonecipher, who left Sundstrand Corp. to join McDonnell in late 1994, is widely credited with rescuing McDonnell from a myriad of problems that developed in the early 1990s.
Another problem is that Boeing would have to pay a very rich price for McDonnell because a flurry of industry merger activity in the past month has sent defense industry values sharply higher, sources said.
McDonnell executives proposed that Boeing pay $110 to $125 a share--or a total of $12 billion to $14 billion--depending on whether it was done in cash or stock, sources said.
“It was very generously priced,” said Wolfgang Demisch, an analyst at BT Securities in New York. “The odds were not overwhelmingly in favor of this deal happening.”
McDonnell’s stock closed Tuesday at $92.125 a share, up 12.5 cents, in New York Stock Exchange composite trading, while Boeing’s stock fell $1 to $76 a share.
In recent weeks, Northrop Grumman Corp. announced a $3.6-billion acquisition of Westinghouse Electric Corp.’s defense group, and Lockheed Martin Corp. announced a $9.1-billion deal to buy Loral Corp.’s defense electronics interests.
But some defense industry analysts now believe that prices may be peaking. “You are getting into a range that is very pricey,” said C. Donald Scales, aerospace director at the consulting firm A.T. Kearney. “It can’t run up too much more. The fundamental values don’t support it.”
Even if a merger does not materialize, it could be a turning point in the frenetic consolidation of the defense industry of the past few years, whereby companies have been merging to cope with the post-Cold War cuts in Pentagon spending.
Jon Kutler, president of the investment bank Quarterdeck Investment Partners Inc. in Los Angeles, said there will be more defense mergers through the decade, but they will be much smaller than a Boeing-McDonnell merger.
Indeed, both firms would leave their bargaining table looking for some other combination that would reinforce their market positions, analysts said.
“You are going to have to do defense mergers the old fashioned way, a billion here and billion there,” said PaineWebber Inc. analyst Jack Modzelewski. “Among the big guys, there doesn’t appear to be many combinations left.”
