FOR MOST of the 1980s and early 1990s, McDonnell Douglas Corp. of St. Louis was the nation's premier defense contractor. It won the most government contracts and it built the prestigious projects, such as the F-15 and the F/A-18 Hornet.
Last weekend, McDonnell Douglas stumbled badly. The Pentagon picked Bethesda's Lockheed Martin Corp. and Seattle's Boeing Co. as finalists in the bid to build the Joint Strike Fighter, a warplane program that could be worth $300 billion in the early part of the next century.
This is the only fighter plane the Pentagon expects to build for many decades. So, even though McDonnell Douglas has a current backlog of more than $40 billion, the company faces the prospect of its storied warplane heritage drawing to a close.
Where does McDonnell Douglas turn now?
Publisher, Defense Mergers & Acquisitions newsletter
I think they start looking around for something to buy. They have a lot of money. They have a number of businesses that could be added onto. They've got a fine helicopters business, a very good space launchers business, and they've got a small but good missiles business.
There's been some speculation that they might be interested in Texas Instruments, which would be a big help for their missiles business.
There's a really good analogy for this situation. Northrop a few years ago looked at its business base and saw that it was dominated by the B-2 bomber, and saw the writing on the wall that B-2 production was going to end. So they merged with Grumman and bought themselves a whole bunch of new programs.
McDonnell Douglas is in the same situation now. Missiles, helicopters and space launchers are where McDonnell Douglas' future lies, and they can make acquisitions in any of those areas.
They have done a beautiful job of cutting their payroll and squeezing costs out of their structure. Operationally, the company is stronger than they've ever been. But they keep losing the big ones in the aircraft business.
Vice president, First Equity investment bank, Stamford, Conn.
I think losing the Joint Strike Fighter was a pretty big disappointment for McDonnell Douglas. But I think there's plenty of work out there. I don't think they're going to be crippled.
The JSF contract is so far out in the future that I think the stock market is discounting the effects of this decision, at least for now.
McDonnell Douglas has the F/A-18 for another 20 years, then they need to replace that revenue. I'm looking for them to do something in the way of a merger or acquisition. I think there is a bit of exaggeration in reports of their demise. They still have a lot of programs going. Clearly it was a big loss for them, not to make the next round of Joint Strike Fighter, but it's not the end of the world. They're still a force to be reckoned with.
Defense analyst, The Teal Group
The next step for McDonnell Douglas? Death spiral. That would seem to be the most logical thing. They should try and use what they've got left to gain leverage with an alliance or merger or anything to prevent the complete destruction of their corporate identity.
Another scenario is to do a General Dynamics type thing and return value to shareholders by spinning off units and ultimately reduce themselves to that ultimate paradox, the niche diversified corporation. McDonnell Douglas Helicopters might fetch a nice price, for instance. Lockheed Martin would love that. But a Boeing-McDonnell Douglas merger is really the tie-up to watch.
To advance for the Joint Strike Fighter, Boeing needs fighter integration skills. That's one of the reasons they bought Rockwell: They need a capable fighter design house to bring on board. Rockwell helps, but McDonnell Douglas is the ultimate prize.
Harry C. Stonecipher
President and CEO, McDonnell Douglas Corp., from a Nov. 18 letter to employees
Although [losing the Joint Strike Fighter competition] is disappointing news for all of us here and at [teammates] Northrop Grumman and British Aerospace, we should remember that our team was a tough competitor.
We devised an innovative near-tailless design that is destined to change the look of future fighter aircraft. And we have made great technological advances that can be applied to our existing products.
This decision does not mean that we are out of the military airplane business. Not by a long shot. This is a team with a bright future.
People have counted us out before in past decisions like the JSF, but we have always bounced back. McDonnell Douglas is the world's foremost builder of tactical aircraft, and our team intends to remain a leader in our industry.
Pub Date: 11/24/96