Boeing Will Buy Top Rival Merger With Mcdonnell Douglas Will Create World’s Largest Aerospace And Defense Company
The Boeing Co. announced Sunday that it will acquire McDonnell Douglas Corp. in a blockbuster $13.3 billion merger that creates the world’s dominant power in aerospace.
With an estimated $48 billion in annual sales and 200,000 employees, the combined company will be the largest supplier of combat jets to the Pentagon, spacecraft to NASA and passenger jetliners to the world’s airlines.
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 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.
Boeing plants will span 27 states with thousands of employees in such politically powerful places as California, Washington, 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 Phil Condit said the merger of the two companies, 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 during 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 also will mark the final exit of the McDonnell family from top management of the aerospace industry with the retirement of McDonnell Chairman John McDonnell.
Boeing, which will absorb about 27,420 McDonnell workers, only last week had finalized the acquisition of Rockwell International’s aerospace business with 14,500 California employees.
As far as big layoffs that frequently result from defense mergers, Condit said he did not expect any.
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 even generally about the potential size of such cutbacks.
Condit said he expected few anti-trust problems with the merger, though he and Stonecipher were scheduled to meet this morning with National Aeronautics and Space Administration Administrator Daniel Goldin and Deputy Defense Secretary John White to discuss the effects of the merger.
Indeed, the apparent lack of an antitrust problem in the merger of the two companies’ commercial aircraft operations reflects the hard times that have befallen McDonnell, which no longer has a serious presence in the world market.
The deal was cut in a one-on-one meeting Condit and Stonecipher held in Seattle last Tuesday and quickly approved by the two companies’ boards. The two executives denied it amounts to a shotgun marriage triggered by a recent series of McDonnell setbacks in defense contracts. Rather, they said the two companies first discussed a merger three years ago.
Condit said he hoped to realize $1 billion in cost savings annually.
It long has appeared that Douglas was doomed, starved for investments to modernize its facilities and losing market share each year to its increasingly stronger rivals. It has less than 10 percent of the world market now.
Boeing had in recent weeks agreed to cooperate with Douglas, obtaining the company’s engineering help to design a new variant of the 747 jumbo jet.
Even though the two companies are merging, Douglas jets will continue to be sold under the Douglas name and whether those jets survive as Boeing products “will be decided by the customers,” Condit said.
Wolfgang Demisch, an analyst with B.T. Securities of 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 acquisition represents an effective way to sharply increase its design and production capacity.
One of Boeing’s key motives in seeking McDonnell was to ensure that neither Airbus nor future Asian competitors struck a deal with the 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,” PaineWebber analyst Jack 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.
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.
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, exactly 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 Lockheed Martin, the defense giant created in 1995 in a $10 billion deal.
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.
xxxx The players Here’s a look at the two merging companies: Boeing World’s top maker of commercial aircraft; $19.5 billion in sales in 1995; employs 105,000. McDonnell Douglas World’s top maker of military aircraft; No. 3 in commercial airplanes; $14.3 billion in sales in 1995; employs 63,612. - Knight-Ridder
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