Boeing and Airbus; two longtime rivals fighting over market share in an extremely volatile market due to high research and development costs and constant changes in market demand was the cause for Boeing to take drastic protective measures. Boeing which at the time was one of the largest commercial aircraft manufacturer and third largest aerospace defense contractor decided to merge with McDonnell Douglas. McDonnell Douglas also produces commercial aircraft but held much less of the market share than Boeing. The intent of this paper is to describe the search and screening process Boeing used which is broken down in to three categories: legal, financial and operational, discuss the valuation criteria, analyze the negotiation and bidding process and determine what kind of financing Boeing used to secure McDonnell Douglas.
When Boeing announced they were planning on purchasing rival McDonnell Douglas, this sparked a great deal of concern not only with the Federal Trade Commission but with anti-trust authorities in Europe as well. “The belief was that by reducing the markets to only two players, such a merger would so reduce the competition that consumers would be forced to pay more for airline tickets and tax payers would be forced to pay more for jet fighters and space vehicles” (http://www.washingtonpost.com/wp-srv/business/longterm/boeing/boeingtoo.htm). The goal addressing these concerns was to prevent Boeing and McDonnell Douglas from creating a monopoly of the aircraft and aerospace market.
A monopoly is a situation in which a single company owns all or nearly all of the market for a given product or service (“Monopoly”, 2012). The concern in Europe was due to Boeing’s Practice of negotiating exclusive supply deals with major airlines such as Delta Airlines, American Airlines and Continental Airlines that prohibited purchases of Airbus planes (“European Union Objects To Just About Everything In Boeing-Mcdonnell Merger”, 1997). In the end, Boeing was forced to make concessions to ensure the merger would be allowed to go through. Andrews (1997) “Boeing agreed not to enforce the exclusive-supplier provisions of those deals, though analysts said that would have little effect on Boeing’s bottom line” (para. 3).
The commercial and defense aircraft market is extremely volatile and will change from extreme high demand in one or both commercial and defense to a decline in demand in one or both areas. At the time of this merger, Boeing had seen huge changes in defense spending that caused growth on the commercial side of the aircraft market. For Boeing this was a favorable change due to the fact that eighty percent of their products were for commercial aircraft rather than defense. Rolinitis (1997) “Although these factors heavily favored Boeing’s make-up, Boeing was still concerned with the severe cyclical swings that the commercial market faces” (Boeing’s View). Boeing’s main concern was to gain market share to better compete with the Airbus which was the second largest commercial aircraft manufacture that held most of its operations in Europe.
At this time, McDonnell Douglas was structured exactly the opposite; two thirds of its revenue generated from defense products. Due to severe cuts in defense spending, McDonnell Douglas was consistently losing market share. This situation made an attractive opportunity for Boeing to merge with McDonnell Douglas and seemed that it would work out for both parties; Boeing would gain more market share in European markets and McDonnell Douglas would in essence not have to suffer large losses waiting for defense spending to increase.
The merger between Boeing and McDonnell Douglas was viewed by most a perfect match. The new company would have operations in the United States and Europe; maintain market share in both commercial and defense aircraft production markets. For Boeing, the only downside is they were forced to give up exclusive supplier relations with three airlines; however that did not seem to have that large of a negative effect on the new organization. Rolinitis (1997) “The merged company will have approximately 200,000 employees which included the recent Boeing merger of Rockwell aerospace and defense units. It will operate with estimated 1997 revenues in excess of $48 billion, making it the largest integrated aerospace company in the world” (The Deal).
The air craft production industry is one of the most volatile industries due to ever changing supply and demand and high research and development costs. As the air craft market changed moving towards more commercial demand and declining defense demand, it became in the best interest for Boeing and McDonnell Douglas to merge into one joint company making them the largest commercial and defense air craft production company. There can be quite a bit of issues concerning the merger of two companies; some concern what is in the best interest of one company and others may include the concern of not violating trade laws. The purpose of this paper was to describe the search and screen process and issues; specifically legal, financial, and operational status, discuss the valuation criteria, valuation and negotiation and bidding processes of the merger between McDonnell Douglas and Boeing.
Andrews, E. L. (1997). Boeing Concession Averts Trade War With Eurpe. The New York Times. Retrieved from http://www.nytimes.com/1997/07/24/business/boeing-concession-averts-trade-war-with-europe.html European Union Objects to Just About Everything in Boeing-McDonnell Merger. (1997). Retrieved from http://www.prenhall.com/divisions/bp/app/phblaw/html/august/august5.html Monopoly. (2012). Retrieved from http://www.investorwords.com/3112/monopoly.html Rolinitis, S. (1997). The Boeing & McDonnell Douglas Merger. Retrieved from http://economics.illinoisstate.edu/dloomis/eco320/downloads/papers/steve.PDF
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