News: Analysis & Commentary: DEALS
BOEING AND McDONNELL: WILL IT FLY?
In recent weeks, Boeing Co. and McDonnell Douglas Corp. have been sniping at each other like two pilots in a dogfight. In fiercely competitive bidding, McDonnell in mid-October bested Boeing on a $1 billion order from upstart ValuJet Airlines Inc. with its new 100-seat MD-95. Then, on Nov. 3, McDonnell convinced the Pentagon that its once troubled C-17 transport plane was back on track and won an $18 billion order, topping a Boeing bid. But behind the scenes, sources say that the fierce rivals have been discussing a truce--one that ranges from linking their military units to merging the two companies altogether.
There is powerful logic to a combination. Boeing, with just 1% of Pentagon contracts, is an also-ran in defense. Adding its military business to that of No.2 McDonnell would create the U.S.'s top military supplier, ahead of recently merged Lockheed Martin Corp. McDonnell's reviving but still struggling commercial-airliner business, meanwhile, would get a boost that would ensure its survival. Together, the two companies would have estimated 1995 sales of $34 billion, figures analysts Cowen & Co. "A merger would give each of the two parties a way to deal with a chronic weakness," says one McDonnell veteran.
BITS & PIECES. The challenges to a large-scale deal are sobering. They include antitrust concerns about combining commercial-plane units that together have 70% of the world's backlog of plane orders, deep cultural divides between the rivals, and labor-union fears of massive layoffs. Neither Boeing nor McDonnell will comment.
Those obstacles, say bankers familiar with the talks, mean that any eventual deal is more likely to focus solely on a combination of the two companies' military and space units. Each company has made clear its interest in expanding its helicopter, missile, space station, and rocket businesses. Industry sources say that in the past year, McDonnell has looked seriously at buying United Technologies Corp.'s Sikorsky Aircraft helicopter unit, while Boeing eyed Textron Inc.'s Bell Helicopter unit. If Boeing and McDonnell don't get together, bankers expect them to link with others.
Still, structuring even a limited Boeing-McDonnell defense deal could be tricky. McDonnell, with estimated 1995 military and government sales of $10.1 billion, would dominate Boeing, which has about half that amount. But since Boeing sees synergy between commercial and military technology, it is unlikely to sell off its military unit. Rather, most bankers foresee joint ventures or swaps of units. Analyst Cai von Rumohr of Cowen, which is not involved in any talks, says one plausible outcome is that McDonnell, which makes Apache helicopters, will buy Boeing's Comanche and Chinook products while selling to the Seattle company its own missile and space operations.
Nevertheless, a broader deal isn't entirely out of the question, say antitrust experts. Boeing and McDonnell executives could argue that a new McBoeing would be more effective in global markets against Europe's Airbus Industrie, Boeing's main rival, plus potential new competitors that are expected to sprout up in Asia. That reasoning finds favor with suppliers to both companies. "To the extent a deal makes a more potent force globally, it's good for suppliers," says David W. Schroeder, vice-president for W.H. Brady Co., which sells labeling products to both companies. Even European regulators might not object. "Customers will still play off Airbus against Boeing to drive down prices," says a European Commission official.
PINK SLIPS? The toughest gbstacle might be trying to cut back McDonnell Douglas' plane operations, which now, product for product, overlap with Boeing's. And the specter of massive job losses at either company, after tens of thousands of employees already have been laid off in recent years, would undoubtedly bring on the wrath of politicians and union leaders. McDonnell already has been aggressively outsourcing production in the U.S. and overseas--precisely the issue that prompted a six-week strike at Boeing that was only tentatively settled on Nov. 19.
If the wide array of merger issues can be resolved, any sort of deal would be a fitting legacy for the managers of both Boeing and McDonnell. Boeing Chairman and CEO Frank A. Schrontz plans to retire in a year and is expected to turn the reins over to Philip M. Condit and a new team of execs who have been striving to break down Boeing's hierarchical structure. At McDonnell, CEO Harry C. Stonecipher, 59, the first non-McDonnell family member to run the company, has already achieved two key goals--getting the C-17 on track and keeping McDonnell's commercial-plane operation aloft. Now, the two companies may have to learn to live together--or with someone else.By Richard A. Melcher in Chicago, with Catherine Yang in Washington, Seanna Browder in Seattle, and bureau reports