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Thursday, November 16, 1995 - Page updated at 12:00 AM

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Boeing Discussing Merger? -- Company Reportedly Talking With Mcdonnell Douglas

Seattle Times Business Reporter

In a move that could reshape the aerospace industry and have a major impact on the Puget Sound economy, The Boeing Co. and McDonnell Douglas Corp. reportedly are considering a merger that would create a powerhouse company dominating the commercial and military aircraft markets globally.

The two companies share about 70 percent of the commercial jetliner market worldwide, and Boeing has a dominant 60 percent of world orders. While Boeing offers five major models of commercial jets, McDonnell Douglas produces only two: an MD-90 line that competes with the 737 and the MD-11, a trijet that is being overwhelmed by Boeing's more efficient new 777 twinjet.

McDonnell Douglas, based in St. Louis, is the top fighter-jet producer with its F-15 and F/A-18 models, and recently was bolstered by an order for 80 C-17 transports. Boeing is a major subcontractor on military jets, but only about 22 percent of its business is defense-related.

Both companies have helicopter and space divisions that analysts believe could easily be merged. Both companies, under Boeing's leadership, are working on the space station to be launched late in the decade.

The industry was abuzz after a report of secret talks being conducted in New York was published by the Wall Street Journal. Boeing's Harold Carr, vice president of public relations/advertising, would not comment on the report. McDonnell Douglas' Tom Williams wouldn't comment, either. Industry analysts were quick to note that neither party denied they were in negotiations.

"If this were to happen in spite of antitrust laws in the U.S., the international competition would become even more fierce," said Barbara Kracht, a spokeswoman for Airbus Industrie, the European competitor which has grabbed about 30 percent of the worldwide commercial market in the past 20 years.

"With only one supplier based in the U.S., we think that the world's airlines would need even more the benefits of a strong competitor such as Airbus," she said. How the federal government would view such a merger remains to be seen.

U.S. Rep. Norm Dicks, D-Bremerton, said the Defense Department has encouraged such mergers to strengthen its suppliers.

"The more important question is how the Justice Department views this in terms of the two major commercial airplane manufacturers coming together," said Dicks. "Since Airbus has become such a dominant competitor out there, I don't think that would be a problem."

Stock analysts' reactions varied, but all were surprised at the news, partly because of the timing. McDonnell Douglas' value has increased about 80 percent in the past year, making it worth about $9.7 billion.

Any merger, they say, really would be a Boeing acquisition since it is so much larger - worth an estimated $25.3 billion. The two companies combined have about nearly 190,000 employees. Combined sales last year were $35.1 billion, with Boeing having the largest share at about $22 billion.

The government has been encouraging defense mergers since the end of the Cold War put the skids on Pentagon spending for hardware. The most recent merger created the Lockheed Martin Corp., now the largest defense company. It had sales of about $23 billion last year.

A Boeing-McDonnell Douglas merger would create a company 50 percent larger than Lockheed Martin, as measured by sales, and more than twice the size as measured by market value.

"Such a merger makes a whole lot of sense, giving such a company more efficiency, more clout," said Bill Whitlow, Seattle analyst with Pacific Crest Securities. But he doesn't think it will happen because of the anti-trust concerns.

Whitlow said a merger is logical and, if it occurred, he believes Frank Shrontz, the soon to be 64-year-old Boeing chairman, would be the top manager. McDonnell Douglas' chief, Harry Stonecipher, is 59, and Boeing president Phil Condit is 54.

He speculated that company headquarters would likely remain in Seattle, partly because Washington state has no personal income tax. Boeing also has major new factories. How job cuts, likely in any merger, would be distributed is unknown.

George Shapiro at Salomon Brothers in New York had an opposite view, saying the idea makes no sense: "Why would Boeing want to be bigger in military when the future lies in the commercial side of the industry?" Shapiro asked. "It would gain little, and it might even send more business to Airbus because airlines would be worried about just one supplier."

Customers didn't seem bothered by the prospect of such a merger.

Lewis Jordan, president and co-founder of ValueJet Airlines in Atlanta, which just completed a launch deal with McDonnell Douglas for its MD-95 over bids from Boeing and Airbus, said he wouldn't have any objections to a merger.

"We know Airbus is a fierce and effective competitor and would keep things competitive," he said.

"It's an international market out there, and if they (Boeing and McDonnell Douglas) decide they need to merge, we'd be delighted. Both are terrific companies."

Material from Seattle Times Washington bureau reporter Robert T. Nelson, Seattle Times business reporter Greg Heberlein and Bloomberg Business News was included in this report. ----------------------------------------------------------------- A look at two aerospace giants

BOEING

Revenue by product segment, 1994 data, in billions of dollars

Defense and space --- $4.74 . Commercial aircraft -- $16.85 . Other industries ---- $0.33 .

Total: $21.92 billion.

Net income (in millions) $856.0. Employees 105,420 . Total constractual backlog $66.31.

(in billions).

Market value (in billions) $25.3.

----------------------------------------------------------------- McDonnell Douglas

Revenue by product segment, 1994 data, in billions of dollars

Commercial aircraft -- $3.16 . Financial Services and other $0.33 . Missiles space and electronic systems $1.88. Military aircraft $7.80.

Total: $13.16 billion .

Net income (in millions) $598.0. Employees 65,760. Total contractual backlog $29.23.

(in billions). Market value (in billions) $9.6.

SOURCE: Company reports. ----------------------------------------------------------------- Seattle Times

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Copyright (c) 1995 Seattle Times Company, All Rights Reserved.

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