What the Mega-Merger Means
Folding McDonnell Douglas into Boeing paves the way for more consolidation
The Boeing Company's buyout of McDonnell Douglas Corp. has shaken aerospace industry rivals, astounded onlookers, and worried some antitrust experts by its sheer size.
If the deal goes through, analysts say the behemoth would face basically one key competitor in commercial aircraft, Europe's Airbus Industrie, and one archrival in defense aircraft, Lockheed Martin Corp. Yet, despite diminished competition on both sides of the aerospace industry, many observers say the daring deal is likely to overcome antitrust hurdles.
The implications of the $14 billion merger are discussed below.
What will it mean for the fares paid by airline passengers?
It's possible that jetliner costs may rise with only two companies making large planes rather than three. If so, airlines would pass these higher costs on to consumers. But McDonnell Douglas has been winning only about 5 percent of the industry's new orders lately, and competition between Boeing and Airbus could remain fierce.
Will the Pentagon be hurt?
Some top brass are worried that consolidation may be going too far, but the military has been a backer of the consolidation trend. In the leaner post-cold-war era, the Pentagon would rather see a few healthy suppliers than many strugglers.
The new Boeing Company (with McDonnell) will go head-to-head with Lockheed Martin to build fighter planes. Further mergers in the industry could pare other markets - such as for missiles - down to two major players as well.
Will the merger pass antitrust scrutiny?
The two companies are optimistic, but regulators are sure to give the deal a hard look. Bill Whitlow, an analyst at Pacific Crest Securities in Boeing's home city of Seattle, says the commercial side of the equation will pose bigger challenges than defense. In the merger's favor: McDonnell was clearly struggling for money to develop new planes, without which it could not remain a long-term player in this research-intensive business. The St. Louis company has explored other deals, including an alliance with Taiwan Aerospace several years ago that did not pan out.
"A lot depends on what the airlines think," says Steve Sunshine, a former antitrust official at the Justice Department. "If ... all the airlines line up to say it's bad, it's probably going to get challenged."
Will there be more mergers?
Yes, analysts say, and they've already been occurring at a furious pace. On a $40 billion list of defense mergers in the past four years: Boeing just bought Rockwell International's defense business for $3 billion; and Lockheed Martin purchased electronics giant Loral in April for $9 billion.
Hughes Electronics is the big kid on the selling block. McDonnell had thought about buying the General Motors division before the Boeing merger was finalized on Dec. 15. A possible buyer for Hughes is Massachusetts missilemaker Raytheon Corp. Los Angeles bomber manufacturer Northrop Grumman also now looks as if it needs a merger to stay in the game.
Meanwhile, Europe's defense industry is seen as ripe for US-style consolidation.
How will jobs be affected?
That's unclear. The merger occurs amid a commercial-airplane boom for Boeing, and even McDonnell has won some recent orders. For now, the two firms say they've got plenty of work to go around. No layoffs have been announced, and Boeing has added 20,000 jobs this year. The new company will employ about 200,000 people - 42,000 in southern California, home to McDonnell's passenger-jet production, and even more in Seattle. It is uncertain whether Boeing will some day use McDonnell's Long Beach, Calif., factory for final assembly of some its own jetliners.
The defense business, while shrinking in recent years, is still big, and the related space and satellite-launch business is growing. This means jobs for others as well as Boeing. A few days ago, Lockheed Martin said it expected to hire 3,000 workers in the next three years for its missile/space unit.
What will become of McDonnell Douglas's commercial-jet business?
The company's existing orders will be filled and its planes will continue to be serviced over the coming decades, Boeing chief executive Philip Condit pledges. But new-airplane development will occur in Boeing's already-sprawling family of jets.