Boeing to Acquire Douglas, Creating Aerospace Behemoth

By RALPH VARTABEDIAN

Dec. 16, 1996 12 AM PT

TIMES STAFF WRITER

WASHINGTON —

The Boeing Co. announced Sunday that it will acquire McDonnell Douglas Corp. in a blockbuster $13.3-billion merger that would create the world’s dominant power in aerospace and transform Southern California’s industrial landscape.

With $48 billion in annual sales and 200,000 employees--42,000 of them in Southern California--the combined company would be the largest supplier of combat jets to the Pentagon, spacecraft to NASA and passenger jetliners to the world’s airlines. It would become the biggest private industrial employer in the region.

The stock merger ranks not only as the largest in dollar terms in aviation history but also as the most economically significant because, experts said, it lays a foundation for preserving the long-term U.S. dominance of the world aerospace industry.

“I don’t believe there has been such a concentration of aerospace talent and financial capability as there will be in Boeing in the entire history of the industry,” said Loren Thompson of the de Tocqueville Institution, a conservative think tank. “These two companies have been dominant in aviation for decades, and now they are coming together.”

Boeing plants will operate in 27 states, including in addition to California, such politically powerful places as Texas, Pennsylvania and Florida. Boeing will continue to be headquartered in Seattle, while its defense business will be directed out of the former McDonnell headquarters in St. Louis.

Boeing Chairman Philip M. Condit said the merger of the two firms--fierce rivals since the earliest days of aviation--will create a “balanced and capable” company whose biggest problem will be managing the vast growth potential confronting it over the next two decades.

Condit will remain as Boeing chairman and chief executive officer, while McDonnell Douglas President Harry Stonecipher will be named Boeing president and chief operating officer. The deal will also mark the final exit of the McDonnell family from top management of the aerospace industry with the retirement of McDonnell Chairman John McDonnell.

What the merger means for California’s long-moribund defense and aerospace industry was not immediately clear, however. Until six months ago, Boeing had no presence in California, but now it will rank as perhaps the largest industrial employer in the state with about 42,000 employees.

Boeing, which will absorb 27,420 McDonnell workers in California, only last week had finalized the acquisition of Rockwell International’s aerospace business with 14,500 California employees. Those plants stretch from Canoga Park to Anaheim.

Condit said he did not expect any big layoffs. While the merger may create redundancies, the expected growth in business should absorb most if not all of those people, he said. But Condit would not rule out layoffs and declined to speculate about the potential size of such cutbacks.

Condit said he expected few antitrust problems with the merger, though he and Stonecipher were scheduled to meet this morning with NASA Administrator Daniel Goldin and Deputy Defense Secretary John White to discuss the effects of the merger.

“We think overall the issue on antitrust is not going to be a very big issue,” Condit said. “Our programs are very complementary.” Indeed, the apparent lack of an antitrust problem in the merger of the two firms’ commercial aircraft operations reflects the hard times that have befallen McDonnell, which no longer has a serious presence in the world market.

Boeing will take over the Douglas Aircraft complex in Long Beach, which ruled as the biggest supplier of commercial aircraft in the world until it was eclipsed, first by Boeing in the 1950s and then by the European consortium Airbus Industrie in the 1980s.

The deal was cut in a one-on-one meeting Condit and Stonecipher held in Seattle last Tuesday and quickly approved by the two firms’ boards. The two executives denied the merger amounts to a shotgun marriage triggered by McDonnell Douglas’ setbacks in defense contracts. Rather, they said, the two firms first discussed a merger three years ago.

Condit said he hoped to realize $1 billion in savings annually.

It long has appeared that McDonnell Douglas was doomed, starved for investments to modernize its facilities and losing market share annually. It has less than 10% of the world market now.

Boeing had in recent weeks agreed to cooperate with Douglas, obtaining the firm’s engineering help to design a new variant of the 747 jumbo jet. But whether Boeing will invest in the Long Beach facility are unclear. Stonecipher said Sunday that Boeing would invest in Long Beach. Condit said separately, however, that the issue has not been decided.

Although the firms are merging, McDonnell Douglas jets will continue to be sold under the that name and whether those jets survive as Boeing products “will be decided by the customers,” Condit said.

As a result, analysts were doubtful that McDonnell Douglas has an assured role as a producer of completed jets. Paine Webber analyst Jack Modzelewski noted that Boeing has never been willing to move production of completed jetliners out of the Puget Sound.

Since the 1960s, however, Boeing’s most serious problems have been managing the volatile growth and slowdowns in commercial jet production at its plants.

Whether the company now wants to establish Southern California as its second major production and design complex is the issue that will determine whether the Long Beach facility withers or becomes part of a major new era of industrial growth for the region.

Wolfgang Demisch of B.T. Securities in New York estimated that Boeing will be producing as many as 500 jetliners per year by the late 1990s, vastly more than it has produced in the past, and the McDonnell Douglas acquisition represents an effective way to sharply increase its design and production capacity.

“This will be a new lease on life for the MD-11,” Demisch said, referring to the long troubled program at Long Beach.

One of Boeing’s key motives in seeking McDonnell Douglas was to ensure that neither Airbus nor future Asian competitors struck a deal with the firm’s Douglas unit that would have reinforced its ability to compete with Boeing.

“It is great for America because it solidifies the commercial aircraft base in this country,” Modzelewski said.

The deal also solidifies Boeing’s standing as the dominant supplier of spacecraft to NASA, giving it virtually the entire U.S. segment of the international space station.

Boeing’s Rocketdyne unit in Canoga Park is building the power supply system for the space station, its future Huntington Beach unit is building the tress structure. Before the merger, Boeing was also managing the overall program and building the habitation units.

Condit said the company will be studying a consolidation of the former Rockwell operations in Seal Beach with the McDonnell operations in Huntington Beach.

Under terms of the deal, each McDonnell share will be exchanged for 0.65 shares of Boeing. Condit said he expects the deal will take up to six months to complete, given the need for federal government review of the deal.

After the merger, Boeing will generate an estimated $6 billion in annual profits before the payment of interest, dividends and taxes--creating enormous investment power. At the same time, the two companies will have combined debt of just $5.5 billion, the same as the $5.5 billion cash it will have on hand.

“The combination of the two companies creates an extraordinarily powerful enterprise that is preeminent in both commercial aerospace and defense,” Demisch said.

In one sense, the merger will help balance competition in the defense industry, which has been dominated by Maryland-based Lockheed Martin, which was created in 1995 in a $10-billion merger.

Aerospace analysts said they expected Boeing, Lockheed Martin and possibly Northrop Grumman to emerge as the dominant U.S. aerospace organizations, gobbling up most of the Pentagon and NASA spending in future years.

Although Defense Secretary William J. Perry encouraged and created the rapid defense industry consolidation in recent years, the ultimate effect of the deals on national security are poorly understood, some experts believe.

“We really don’t know what the long-term effects will be of this kind of consolidation on our competitiveness and our cost effectiveness,” said Dan Goure, a defense expert at the Center for Strategic and International Studies. “We don’t know whether these mergers are creating Microsofts or General Motors, companies that are innovative and nimble or bureaucratic and slow.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Voices

“This will truly stabilize Boeing’s future in the aerospace industry.

--Washington Gov.-elect Gary Locke

“God help you if you want to cancel one of the contracts they have. Their political clout will be enormous.”

--Lawrence J. Korb, Brookings Institution military specialist

“You have created a situation where Boeing now is the [manned] space program. You might as well take the American flag decal off the space shuttle and put a Boeing corporate [logo] in its place.”

--John Pike, space policy director for the Federation of American Scientists

“This sort of consolidation has been going on for time some, and the companies that are emerging from this are probably healthier.”

--Louis Friedman, president of the Planetary Society in Pasadena

“In unmanned spaceflight, it is still more competitive. For manned space flight, this new conglomerate is surely going to be the biggest guy on the block.”

--Alex Roland, former space agency historian

“As Boeing goes, so goes Seattle. And Bellevue. And Renton. And Everett. And so forth.”

--old Seattle joke

“I don’t believe there has been such a concentration of aerospace talent and financial capability as there will be in Boeing in the entire history of the industry. These two companies have been dominant in aviation for decades, and now they are coming together.”

--Loren Thompson, the de Tocqueville Institution

“From a personal point of view, the world evolves.”

--John McDonnell, company chairman and son of company founder James McDonnell Sr.

“If I was in Long Beach, I’d probably feel more comfortable about my future than I did a couple of months ago.”

--Byron Callan, aerospace analyst at Merrill Lynch & Co. in New York

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Defense, Aerospace Merger

The merger creates an aerospace behemoth with 200,000 employees that will dominate the world market for commercial aircraft and be the second-largest U.S. defense contractor.

BOEING CO.:

1995 Sales: $19.5 billion

Employees: 135,000

Headquarters: Seattle

MCDONNELL DOUGLAS CORP.:

1995 Sales: $14.3 billion

Employees: 64,600

Headquarters: St. Louis

COMMERCIAL MARKET:

Shares of commercial jetliner market, based on order backlogs as of Sept. 30: Boeing / McDonnell Douglas: 66%

Airbus Industrie: 34%

TOP DEFENSE FIRMS: