Boeing buys McDonnell Douglas $13.3 billion deal will create world's largest aerospace company

Antitrust approval needed

Lockheed Martin left as firm's lone rival in defense industry

December 16, 1996|By Greg Schneider | Greg Schneider,SUN STAFF

WASHINGTON -- Boeing Co. announced a $13.3 billion deal yesterday to buy McDonnell Douglas Corp., a purchase that will create the world's largest aerospace company and cast a shadow over Bethesda's Lockheed Martin Corp. in the battle for Pentagon business.

If approved by federal antitrust regulators, the jumbo company will carry the Boeing name, expect sales of $48 billion next year and employ more than 200,000 in 27 states. Lockheed Martin, with similar employment, posts annual sales of about $30 billion.

"The thought going through my head as I walked up here was, 'Wow,' " Boeing President and Chief Executive Officer Philip M. Condit said at a news conference.

Condit called the transaction "an historic moment in aviation and aerospace" and called it a "merger." But the details depict a purchase.

Every McDonnell Douglas share will convert to 0.65 shares of Boeing stock -- giving the purchase a $13.3 billion value -- and McDonnell Douglas executives will move to Boeing headquarters in Seattle from their homes in St. Louis.

The deal appears to be the last grand act in the post-Cold War restructuring of the defense industry, shrinking the nation's base of military aircraft builders from three to two.

Defense experts had anticipated such a combination for at least a year, but the consummation still left them dizzy at the prospect of the Seattle titan's standing shoulder-to-shoulder with Lockheed Martin to scrap for business.

"It was inevitable, but yet it's impressive. This creates American Aerospace West to counterbalance American Aerospace East," said Richard Aboulafia of the Teal Group in McLean, Va. "It sure beats watching McDonnell Douglas slowly obliterate itself."

McDonnell Douglas, maker of the Mercury and Gemini space capsules, had been the nation's leading builder of military aircraft and was the biggest defense contractor until Lockheed merged with Martin Marietta last year. Since then, McDonnell Douglas has weathered a series of blows that culminated last month when the Pentagon bypassed the company in favor of Boeing and Lockheed Martin in the competition for the nation's primary 21st century fighter plane.

That program -- the Joint Strike Fighter -- could be the most valuable military contract ever, worth a potential $300 billion.

While McDonnell Douglas executives denied that yesterday's announcement was a direct result of losing that contract, all acknowledged that the new company would be a formidable contender for the joint fighter contract, which will be awarded in 2001.

Boeing's expertise building commercial aircraft combined with McDonnell Douglas' team of fighter experts should leave Lockheed Martin "undoubtedly very scared," Aboulafia said.

Boeing's Condit denied that the union was a "shotgun marriage" brought about specifically to win the Joint Strike Fighter.

And McDonnell Douglas Chairman John F. McDonnell could hardly find enough adjectives to describe what he said would be the "largest, strongest, broadest, most admired aerospace company in the world."

McDonnell and Boeing Chairman Frank Shrontz both said they would retire from their boards by early next year.

Condit will be chairman and chief executive officer of the new company, which will feature two-thirds of the Boeing board and one-third of the McDonnell Douglas board.

McDonnell Douglas President and Chief Executive Officer Harry Stonecipher will be president and chief operating officer of the new company.

Condit and Stonecipher reached the deal Tuesday, ending three years of talks. Condit said company lawyers expected few problems in getting approval from federal regulators because there was little overlap between the companies.

He said the deal should be complete by the middle of next year.

The executives insisted that there would be few layoffs and said there are no plans to close any major facilities.

The experience leaves Boeing watchers a bit breathless, coming only weeks after the company completed its acquisition of the Rockwell defense operations.

The double-deal echoes the creation of Lockheed Martin, which followed its 1995 merger with the acquisition earlier this year of most of Loral Corp.

Lockheed Martin spokesman Charles Manor said yesterday that his company felt no tremors from the new merger. "It's an announcement that we're comfortable with, an announcement that we can support," he said.

Lockheed Martin Chairman and CEO Norman Augustine said in a recent interview that he expected and even encouraged such a mega-merger to take place.

"I would much rather compete with healthy, strong companies that intend to be around for the long haul just as we do than to have a lot of weak companies in the industry," Augustine said last month.

While it is slightly smaller than the new Boeing, Lockheed Martin still claims more defense business. In 1995, Lockheed Martin won almost $10.5 billion worth of work from the Department of Defense.

Boeing and McDonnell Douglas together logged about $9.8 billion in defense contracts that year.

Boeing's production lines include 777 and 747 commercial airliners, the F-22 fighter, the AWACS radar plane, the Comanche helicopter and portions of the space shuttle. McDonnell Douglas programs include the MD-11 civilian airliner, the Navy F-18 fighter, the Air Force F-15 fighter, the Delta III launch vehicle and the C-17 cargo plane.

Pub Date: 12/16/96

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