Mc Donnell Douglas' Recon Mission: Find Investors

Back when the Beatles were cool and the cold war was hot, McDonnell Douglas Corp. could afford to fly solo. A steady stream of ever-faster fighter aircraft for years guaranteed the defense giant hefty profits--so much money that it could easily carry McDonnell's commercial-aircraft unit.

How times have changed. With Pentagon spending falling and St. Louis-based McDonnell losing mammoth defense competitions such as the one to build the Advanced Tactical Fighter, Chief Executive John F. McDonnell has to make his airliner business the company's main profit engine.

MAJOR HITCH. A sensible ambition, but flying wing-to-wing with archrival Boeing Co. requires far more resources than cash-strapped McDonnell can muster. So McDonnell for months has been beating the bushes for both domestic and foreign investors or subcontractors willing to shoulder part of the $3 billion to $4.5 billion it will take to develop the MD-12X, a new jumbo jet to challenge Boeing's venerable 747. And though he hasn't discussed selling an equity stake in the entire commercial business, John McDonnell admits that he would consider the possibility. "We are talking with lots of manufacturers about lots of different arrangements," he says. "I'm open to whatever makes sense." If he can't bring in a well-heeled collaborator, he says, he won't build the new plane.

The son of McDonnell Douglas' founder has little choice but to turn to outsiders. Europe's Airbus Industrie recently leapt past it to become the No. 2 among airframe makers in new orders (BW--Apr. 22). McDonnell booked a mere 4% of new commercial-jet orders in 1990's fourth quarter, and its order book shrank in the first quarter because of cancellations.

John McDonnell sees a broader product line as his best bet to rev up the commercial side. A greater variety would move McDonnell away from its mainstay narrowbody aircraft into the faster-growing, more lucrative markets for long-range and widebody planes.

There's just one hitch: Expanding in commercial aircraft will cost major bucks. Fueled by heavy development spending on the MD-11 and cost overruns on the Navy's recently canceled A-12 attack plane, McDonnell's long-term debt has tripled since 1986, to $3.3 billion. And unless McDonnell and partner General Dynamics Corp. overturn a Pentagon contract-default judgment against their A-12 performance, McDonnell will have to swallow an $850 million in write-offs during the next two years.

HEADACHES. Those numbers are a serious competitive liability for a company that earned only $306 million on sales of $16.3 billion in 1990. "Boeing has $3 billion in cash and little debt, while McDonnell has $3 billion in debt and not as much cash," explains Lawrence M. Harris, analyst at Kemper Securities Group. "So you just have to look at the balance sheets to see who needs a partner."

John McDonnell won't reveal which companies McDonnell has approached about MD-12X stakes but admits he has found no takers so far. Several U. S. aerospace companies, including Rockwell and Northrop, have held discussions about subcontracting, but they haven't signed on to a financing commitment. A more likely investor would be Saab-Scania or another European airframe maker or a Japanese industrial giant. But a foreign tie-up could pose big political problems.

There's one last headache for McDonnell: Even if it finds an equity partner, the bulk of McDonnell's development spending for the MD-12X would come due in the mid-1990s--just as many of its current cash-generating military programs will be winding down. It's a long way from the glory days of the 1960s.

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