Analysts Wonder Whether Merger Would Help Boeing
Seattle Times Business Reporter
The Boeing Co. would gain prominence as a military-aircraft provider by acquiring McDonnell Douglas Corp. Or it could trade assets to combine the two companies' helicopter and space businesses for greater profits.
But what Boeing, the world's leading commercial-jet maker, would gain from a deal involving the St. Louis company's civilian-airliner business is uncertain.
McDonnell Douglas' commercial business is limited to about 10 percent of the worldwide market with two jet models: the MD-90 series that competes with Boeing's best-selling 737, and the larger three-engine MD-11 that never has dominated its market niche.
McDonnell Douglas delivers fewer than 60 airliners a year, compared with Boeing's scheduled 230 this year. Meanwhile, Boeing has five models from the 747 jumbo jet down to the 100-seat 737, and a 60 percent overall market share.
If Boeing did acquire the commercial business of its rival, now centered at Douglas Aircraft Co. in Long Beach, Calif., it is likely that at least the MD-11 would initially be left in production to fill out the order book and then shut down, analysts say.
"Boeing just might want to get rid of a thorn in its side by acquiring the McDonnell Douglas commercial line," suggested Bob Toomey, Seattle analyst with Piper Jaffray. This year's fierce battles for orders from Scandinavian Airlines Systems (won by Boeing) and ValuJet of Atlanta (won by going to McDonnell Douglas) may have heightened such an interest.
But there would still be plenty of competition. Europe's tough Airbus Industrie would vie even harder with one large U.S. rival.
Analysts, caught by surprise at yesterday's news that the two giants were reportedly talking about a merger, believe that if a deal is struck, it more likely would involve a trade of business lines than an outright acquisition by Boeing of the entire McDonnell Douglas operation.
A full merger is especially doubtful at a time when both are enjoying elevated stock prices that would push up acquisition costs, the analysts said.
McDonnell Douglas stock rose $4.375 to $90.675 per share yesterday on the news, while Boeing shares increased $1.875 to $75.875. Boeing's market value is estimated at $25.3 billion, compared with McDonnell Douglas' $9.7 billion, so the Seattle company would be the acquirer in any deal. Boeing had $4 billion in cash and short-term investments at the end of the third quarter.
"They could combine their helicopter business or their space ventures and be formidable," said Paul Nisbet, analyst with JSA Research Inc. in Newport, R.I.
"Both want the space launch business, both are involved in the space station (Boeing is the contract manager), and they could combine their helicopter work, perhaps in joint venture organizations," he speculated.
The two companies also are working with the National Aeronautics and Space Administration on research for a new supersonic jet that which may be developed in the next 20 years.
Nisbet said McDonnell Douglas, which manufactures F-15 and F-18 fighters, would like Boeing's share of work on the F-22 fighter. Boeing is a subcontractor to Lockheed Martin, building the wings and aft fuselage section for the new fighter jet.
He said perhaps McDonnell Douglas would trade its money-making C-17 transport program for the F-22, giving it more fighter dominance and Boeing a profitable military assignment. About 22 percent of Boeing's business is in military planes.
Some question whether Boeing should expand its military business, a sector that is shrinking on virtually every front.
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