Boeing and McDonnell Douglas tie $48 billion knot

Merger of Aerospace Giants Hastens Pace of Consolidation

The proposed merger of two of the nation's largest aircraft manufacturers pushes the consolidation of the military-aerospace industry to a dramatic new level - one that will reshape global competition, raise new antitrust concerns, and affect thousands of jobs across the country.

In a surprise announcement Sunday, Boeing Company and McDonnell Douglas Corp. said they were going to join hands, creating what would be the world's largest aerospace company with some $48 billion in 1997 revenues.

The move would bring together Boeing's commercial aircraft-building prowess with McDonnell Douglas's considerable defense capabilities. It represents the latest in a series of mergers that has seen the number of major players in the defense-aerospace field shrink by more than half since the collapse of the Soviet bloc. Nor will it likely be the last.

Many analysts predict that, given the decline in defense spending in the post-cold-war era, the next year will be even more tumultuous for manufacturers.

"1997 will represent the grand finale of defense industry consolidation," says Jay Behuncik, an analyst at Capitoline MS&L, a Washington-based consulting firm.

The merger "represents a continuation of the trend toward defense industry consolidation in response to the major reduction in the market," concurs Murray Weidenbaum, an economist at Washington University in St. Louis. The defense industry will end up with a "handful of giants."

Whether the deal will ultimately be approved, however, remains uncertain. Though both the Pentagon and federal antitrust regulators have been loath to stop the merger trend - and, indeed, have cheered it on in many cases - the latest union would mark a new level of business consolidation.

The Pentagon in particular may raise concerns, judging from some of its past comments about the dangers of "vertical integration" in the defense industry. Vertical integration involves contractors swallowing up their suppliers.

"I much prefer arrangements that lead to horizontal integration, which link up operations that are at the same business level, rather than vertical integration," said Paul Kaminski, the Pentagon's procurement chief, at a conference earlier this year.

Still, it is unclear whether the Pentagon would consider this vertical or horizontal integration, since St. Louis-based McDonnell Douglas serves as prime contractor and subcontractor on a number of major defense projects with manufacturers.

Moreover, Mr. Weidenbaum notes that Boeing and McDonnell Douglas "rarely compete against each other" for defense business. The 1994 merger of Lockheed Corp. and Martin Marietta Corp., which drew no rebuke from either the US Justice Department or Federal Trade Commission, provides a precedent.

While the new merger may stir concerns about antitrust problems in the US, it would likely strengthen the competitive position of US business abroad. On the defense side, the US is far out front of Europe in consolidation in the industry. On the civilian side, the new company would have far more financial muscle to go head-to-head with Airbus, the European maker of commercial jets.

The deal does provide some advantage for each company. Last month, the Pentagon dealt McDonnell Douglas a major blow by naming Boeing and Lockheed Martin as the two finalists in competition to built the Joint Strike Fighter, a military aircraft for the 21st century. With McDonnell's commercial airline orders down compared with competitors, the decision represented a significant setback to a company that until recently was the nation's largest defense contractor. It's uncertain whether Boeing will pare back McDonnell Douglas's struggling commercial jet business, or sell it to overcome antitrust concerns.

For Seattle-based Boeing, the move would help it in its next round of bidding for the Joint Strike Fighter (JSF), against Lockheed Martin. In recent years, Boeing has been making strong moves toward greater involvement in defense contracting.

But the JSF would represent the first fighter plane built by the company since before World War II. McDonnell provides Boeing with expertise in Navy carrier-based aircraft that neither Lockheed Martin nor Boeing currently possess, according to Paul Nisbet, an aerospace analyst with JSA Research in Newport, R.I.

Such advantages are what is likely to continue to fuel other mergers in the industry. Analysts say, for instance, that Lockheed Martin may now look to link up with either Hughes Electronics Corp. or Texas Instruments to strengthen its position in the JSF competition. Raytheon Corp is another possible buyout target.

There is concern in St. Louis about what a merger would mean for the local economy. McDonnell Douglas has a long history of being generous to the community. Still, the city might end up doing well, if Boeing were to win the JSF contract.

The chairman and chief executive officer of the new company would be Boeing President Phil Condit. Harry Stonecipher, the current president and CEO of McDonnell Douglas, would become the president and chief operating officer. It would be headquartered in Seattle. "This is a historic moment in aviation history and aerospace," said Mr. Condit at the merger announcement.

*Jonathan P. Decker in Washington and staff writers Mark Trumbull and David R. Francis contributed to this report.

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