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Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth
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Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth

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  1. NANYANG TECHNOLOGICAL UNIVERSITY SCHOOL OF MECHANICAL AND AEROSPACE ENGINEERING L6003 - Corporate Resource PlanningBoeing Merges McDonnell Douglas, Creating Aerospace Behemoth Submitted by Chandramohan Narendran (G1102353H) Durairaj Shamugasundaram (G1102355H) Kannathasan Nareshkumar (G1102357G) Palanayakenpalayam Thangavelu Prakash (G1100884C) Rajamurthy Kubendran (G1100824D)
  2. Abstract This report is about biggest merger that ever occurred in thehistory of the aircraft industry. This report examines about thecompelling business environment that lead to the two major aircraftfirms making the decision about their integration. This report alsostudies the factors that are persuasive as well as issues which areconflicting to the merger. To better understand the situation of thismerger, we have briefly discussed the history the firms involved, theirrespective market shares, the details of this merger and its aftermathon the global aircraft industry. This report also includes the detailsregarding the legal issues pertaining to the merger and resolutionassociated with Federal Trade Commission (FTC) and EuropeanCommission (EC).
  3. ContentsBoeing Merges Douglas, Creating Aerospace Behemoth ..................................................................... 11.1 Introduction ...................................................................................................................................... 11.2 Mergers............................................................................................................................................. 1 1.2.1 Effect of Mergers on Efficiency.................................................................................................. 12.1 Boeing’s History ................................................................................................................................ 22.2 McDonnell Douglas’s History ........................................................................................................... 33.1 Boeing’s Revenues ............................................................................................................................ 43.2 Boeing’s Earnings .............................................................................................................................. 63.3 Contractual Backlog .......................................................................................................................... 9State of competition in the industry.....................................................................................................104.1 Background of the Merging ............................................................................................................115.1 Key competitive strategies used by the three big players..............................................................126.1 Factors influencing the merging .....................................................................................................13 6.1.1 Buyers ......................................................................................................................................14 6.1.2 Suppliers...................................................................................................................................14 6.1.3 New Entrants ...........................................................................................................................14 6.1.4 Threats of Substitute Products or Services ..............................................................................15 6.1.5 Globalization of the Commercial Aircraft Industry ..................................................................157.1 Boeing & McDonnell Douglas Merger ............................................................................................15 7.1.1 Boeings View............................................................................................................................16 7.1.2 McDonnell Douglas’s View.......................................................................................................167.2 The Deal ..........................................................................................................................................168.1 Effects of Merger ...........................................................................................................................178.2 Potential competitive concerns about the merger........................................................................189.1 Antitrust review ..............................................................................................................................199.2 Substantive issues: FTC vs. EC.........................................................................................................209.3 Resolution of merger review ..........................................................................................................21 9.3.1 FTC approval ............................................................................................................................21 9.3.2 EC approval and Boeing undertakings .....................................................................................2110.1 Conclusion.....................................................................................................................................22
  4. Boeing Merges McDonnell Douglas, Creating Aerospace Behemoth1.1 Introduction The worldwide market for jet aircraft is primarily dependent on long-term trends inairline passenger traffic. And this trend can be explained by factors such as economic growthin developed and emerging markets, political stability, profitability of the airline industry,and the globalization and consolidation of the industry. Other important factors arelimitations in air transport infrastructure such as government and environmental regulationsand air traffic control. Finally product development strategy and overall competition betweenmanufacturers also impact the market. All these factors play a major role in making strategicdecision in concerning with firms future. Here we are going to discuss about one suchimportant decision of Boeing to merge with McDonnell Douglas.1.2 Mergers The purpose of most mergers, like that of companies, is to increase profitability.There are three primary ways for the purchasing firms to gain control of the other firm.  Approach the management, negotiate the terms of the offer, and have the management recommend that the shareholders accept the offer.  Make an offer directly to the shareholders of the firm to purchase their shares at a stipulated price.  Convince the shareholders to vote you into control because you would run the firm more efficiently.1.2.1 Effect of Mergers on Efficiency Mergers that increase efficiency are desirable for both the companies involved and thesociety. One way the efficiencies occur are when firms reduce duplication due to the merger.Another possibility for efficiencies to increase is due to synergies. Firms may benefit fromeconomies of scope where it is less costly for one firm to perform two activities than for twospecialized firms to perform them separately. A final possible way that efficiencies occur iswhen a badly managed firm is taken over by a better management group. Some mergers reduce both efficiency and/or profitability, but are still favourable toconduct. Taxes are one example. If one company is making positive economic profits whilethe other company is losing money, the end result would be less or no taxes for the combinedfirm. Another example is when firms are going to exploit the short-term gains even if thereare long-run losses. The final example of when firms merge even though there may not beincreased efficiencies is when firms acquire additional market power by merging. This givesthe new firm the ability to set price profitably above competitive levels, but is also carefullymonitored by the government’s anti-trust department. 1
  5. 2.1 Boeing’s History The Boeing Company was founded by William E. Boeing in 1916. Their firstairplane, the B&W took its first flight on June 29, 1916. It was a wood, wire, and cloth two-seater seaplane with a cruise speed of 67 mph. Boeing’s first jetliner, the 707, was built tocarry up to 181 passengers and cruise at 528 mph. Its first flight took place on December 20,1957.1980-2000 In 1983, the economic situation began to improve. Boeing assembled its 1,000th 737passenger airliner. During the following years, commercial aircraft and their military versionsbecame the basic equipment of airlines and air forces. As passenger air traffic increased,competition was harder, mainly from Airbus, Boeing had to offer new aircraft, and developedthe single-aisle 757, the larger, twin-aisle 767, and upgraded versions of the 737. During the decade several military projects went into production, including Boeingsupport of the stealth B-2 bomber. As part of an industry team led by Northrop, Boeing builtthe outboard portion of the B-2 stealth bomber wing, the aft centre fuselage section, landinggears, fuel system and weapons delivery system. At its peak in 1991, the B-2 was the largest military program at Boeing, employingabout 10,000 people. The Avenger air defence system and a new generation of short-rangemissiles also went into production. During these years, Boeing was very active in upgradingexisting military equipment and developing new ones. Boeing also contributed to wind powerdevelopment with the experimental MOD-2 Wind Turbines for NASA and US DOE, and theMOD-5B for Hawaii. Boeing was one of seven competing companies that bid for the Advanced TacticalFighter. Boeing agreed to team with General Dynamics and Lockheed, so that all threecompanies would participate in the development if one of the three companies design wasselected. The Lockheed design was eventually selected and developed into the F-22 Raptor. In April 1994, Boeing introduced the most modern commercial jet aircraft at the time,the twin-engine 777, with a seating capacity of approximately 300 to 370 passengers in atypical three-class layout, in between the 767 and the 747. The longest range twin-engineaircraft in the world, the 777 was the first Boeing airliner to feature a "fly-by-wire" systemand was conceived partly in response to the inroads being made by the European Airbus intoBoeing’s traditional market. This aircraft reached an important milestone by being the firstairliner to be designed entirely by using CAD techniques. The 777 was also the first airplaneto be certified for 180 minute ETOPS at entry into service by the FAA. Also in the mid-1990s, the company developed the revamped version of the 737, known as the 737 "Next-Generation", or 737NG. It has since become the fastest-selling version of the 737 in history,and on April 20, 2006 sales passed those of the "Classic 737", with a follow-up order for 79aircraft from Southwest Airlines. In 1995 Boeing announced that the headquarters complex on East Marginal WaySouth would be demolished instead of being upgraded to match new seismic standards.Boeing scheduled demolition of the facility in 1996 and moved the headquarters to anadjacent building. In 1997 Boeings headquarter was located on East Marginal Way South, by 2
  6. King County Airport, in Seattle. In 1996, Boeing acquired Rockwell’s aerospace and defenceunits. The Rockwell business units became a subsidiary of Boeing, named Boeing NorthAmerican, Inc. Boeing maintains a customer profile of 80% commercial and 20% defence. In August1997, Boeing merged with McDonnell Douglas in a US$13 billion stock swap under thename The Boeing Company. However this name had actually been Boeings official namepreviously adapted on May 21, 1961.2.2 McDonnell Douglas’s History McDonnell Aircraft Corporation was founded by James S. McDonnell, Jr., in1939.The Douglas Aircraft Company was founded by Donald Wills Douglas in 1920. The twocompanies came together in a 1967 merger creating the McDonnell Douglas Company. TheDouglas Cloudster, was the first airplane to carry a useful load exceeding its own weight andfirst flew on February 24, 1921. The company then moved on to the Douglas World Cruiserwhich completed its first around-the-world flight on September 28, 1924. The first entirelyMcDonnell-designed aircraft, the XP-67, flew on January 6, 1944. McDonnell Douglasmaintains a customer profile of 28% commercial and 72%Defence.1980–2000 In 1984, McDonnell Douglas expanded into helicopters by purchasing HughesHelicopters from the Summa Corporation for $470 million. Hughes Helicopters was made asubsidiary initially and renamed McDonnell Douglas Helicopter Systems in August 1984.McDonnell Douglas Helicopters’ most successful product was the Hughes-designed AH-64Apache attack helicopter. In 1986 MD-11 was launched, an improved and upgraded version of DC-10. TheMD-11 was the most advanced tri-jet aircraft to be developed. It sold 200 units, but wasdiscontinued in 2001 after the merger with Boeing as it competed with the Boeing 777. Thefinal commercial aircraft design to be made by McDonnell Douglas came in 1988. The MD-90 was a stretched version of the MD-80, equipped with International Aero Engines V2500turbofans, the largest rear-mounted engines ever on a commercial jet. The MD-95, a modernregional airliner closely resembling the DC-9-30, was the last McDonnell Douglas designedcommercial jet produced. On 13 January 1988, McDonnell Douglas and General Dynamics won the US NavyAdvanced Tactical Aircraft (ATA) contract. The US$4.83 billion contract was to develop theA-12 Avenger II, a stealthy, carrier-based, long-range flying wing attack aircraft that wouldreplace the A-6 Intruder. Technical issues, development cost overruns, growing unit costs,and delays led to the termination of the program on 13 January 1991 by Defence SecretaryDick Cheney. Years of litigation would proceed over the contracts termination: thegovernment claimed that the contractors had defaulted on the contract and were not entitledto the final progress payments, while McDonnell Douglas and General Dynamics believedthat the contract was terminated out of convenience and thus the money was owed. The casecontinues to sit in litigation in 2011. The chaos and financial stress created by the collapse ofthe A-12 program led to the layoff of 5,600 employees. The advanced tactical aircraft role 3
  7. vacated by the A-12 debacle would be filled by another McDonnell Douglas program, theF/A-18E/F Super Hornet. However the purchasing of aircraft was curtailed as the Cold War came to an abruptend in the 1990s. This curtailment in military procurements combined with the loss of thecontracts for two major projects, the Advanced Tactical Fighter and Joint Strike Fighter,severely hurt McDonnell Douglas. In 1991, MD-11 was not quite a success, on-going tests of the MD-11 revealed asignificant shortfall in the aircrafts performance. An important prospective carrier, SingaporeAirlines (SIA), required a fully laden aircraft that could fly from Singapore to Paris, againststrong headwinds during mid-winter; the MD-11 did not have sufficient range for this at thetime. Due to the less-than-expected performance figures, SIA cancelled its 20-aircraft MD-11order on August 2, 1991, and ordered 20 A340-300s instead. In 1992, McDonnell Douglas unveiled a study of a double deck jumbo-sized aircraftdesignated MD-12. Despite briefly exciting the market, the study was perceived as merely apublic relations exercise to disguise the fact that MDC was struggling under intense pressurefrom Boeing and Airbus. It was clear to most in the industry that MDC had neither theresources nor the money to develop such a large aircraft, and the study quickly sank without atrace. A similar double deck concept was used in Boeings later Ultra-Large Aircraft studyintended to replace the 747, but ultimately the double deck concept would not see the light ofday until the Airbus A380 in the 2000s.3.1 Boeing’s Revenues Operating revenues for 1995 were $19.5 billion compared with $21.9 billion in 1994and $25.4 billion in 1993. The declines in revenue for the past two years were due to fewercommercial jet transport deliveries as a result of economic conditions and airline industryovercapacity in most major market areas of the world. Additionally, a ten-week strike duringthe fourth quarter of 1995 by the International Association of Machinists and Aerospaceworkers (IAM) resulted in the delay of about 30 jet transport deliveries representingapproximately $2 billion in reduced sales in 1995. Adjusting for the impact of the labourstrike, the Company’s commercial jet transport market share has averaged approximately60% in terms of sales value of deliveries over the three-year period. Commercial jet transportdeliveries by model (fig 1): Figure 1 Deliveries by Boeing 4
  8. Commercial aircraft products and services accounted for 71%, 77% and 81% of totaloperating revenues for the years 1995, 1994 and 1993. Total commercial aircraft production declined from a rate of 32 1/2 aircraft per monthat the beginning of 1993 to 18 1/2 in the fourth quarter of 1995, prior to the IAM labourstrike. Production rates for all models are expected to recover to prestrike levels during thefirst quarter of 1996. Based on current schedules, total aircraft production will increase to 22 1/2 per monthby early 1997. The following production rate increases are planned for the second half of1996: the 747 from 2 to 3 1/2 per month, the 767 from 3 1/2 to 4 per month, and the 737 from7 to 8 1/2 per month. The 757 production rate will be decreased from 4 to 3 per month, alsoin the second half of 1996. The 777 production rate is scheduled to reach 3 1/2 per month bythe third quarter of 1996 and 5 per month by early 1997. Total commercial jet transport deliveries for 1996 are currently projected to beapproximately 215 aircraft. Commercial transportation sales trends are discussed further inthe Commercial Aircraft Business Environment and Trends section.Sales by industry segment: Figure 2 Sales by Industry Segment (Boeing)Commercial aircraft sales by geographic region: 5
  9. Figure 3 Sales in Geographical Regions Defence and space segment revenues, including activities previously identified as"Other industries" in prior years, were $5.6 billion for 1995, compared with $5.1 billion and$4.9 billion for 1994 and 1993, respectively. The International Space Station program was themajor contributor to the increase in defence and space revenues in 1994 and 1995, followingNASA’s selection of Boeing Defence & Space Group as the prime contractor for therestructured Space Station program in 1993. The 707 and 767 Airborne Warning and ControlSystem (AWACS) programs and the V-22 program also had increased sales in 1995. Salesassociated with B-2 bomber subcontract work declined in both 1994 and 1995. TheCompany’s Defence and space business is broadly diversified, and no program accounted formore than 20% of total 1993–1995 Defence and space revenues. The International SpaceStation program represented approximately 25% of total 1995 sales. The principal contributors to Defence and space sales in 1995, in addition to theSpace Station program, included F-22 fighter aircraft engineering and manufacturingdevelopment activities, production and remanufacturing of CH-47 helicopters, V-22 Ospreytiltrotor transport development and test activities, E-3 AWACS updates, 767 AWACSdevelopment and manufacturing, B-2 bomber subcontractor work, RAH-66 Comanchehelicopter development activities, and various facilities management and information servicescontracts (previously reported as "Other industries"). U.S. Government classified projectsalso continued to contribute to Defence and space segment revenues. The Company’sactivities on the F-22, RAH-66 and V-22 programs are under joint venture teamingarrangements with other companies. Defence and space activities are discussed further in the Defence and Space BusinessEnvironment and Trends section. Based on current programs and schedules, the Companyprojects total 1996 revenues to be approximately $22 billion.3.2 Boeing’s Earnings Net earnings of $393 million for 1995 include the recognition of a $600 million one-time pre-tax charge, or $390 million after-tax, for the special retirement program offered inthe first half of 1995. Excluding the one-time special retirement program charge, net earnings 6
  10. for 1995 were $783 million, $73 million lower than the 1994 net earnings of $856 million.The lower comparable earnings were primarily due to the decline in commercial jet transportsales discussed above. Also contributing to lower earnings was an increase in interest expenseof $21 million in 1995 due to less interest being capitalized on plant and equipmentinvestments. These factors were partially offset by lower research and development expense, anincrease in other income of $87 million principally attributable to increased interest incomeon investments, and a negative income tax provision. Research and development expense of$1,267 million for 1995 was down $437 million from 1994, primarily due to reduced 777developmental expenditures. The negative effective income tax rate for 1995 was due to therecognition of higher tax benefits, together with the lower relative pre-tax earnings after thesecond quarter earnings charge for the special retirement program and the effect of the labourstrike in the fourth quarter. The tax benefit recognized for 1995 included a research andexperimentation tax credit of $90 million, primarily associated with the initial 777development program that was substantially completed in 1995, and Foreign SalesCorporation tax benefits of $75 million. Without the special retirement program charge, theeffective tax rate for 1995 would have been 18.4%, compared with 25.1% in 1994. Researchand experimentation tax credit and Foreign Sales Corporation tax benefits were $60 millionand $65 million, respectively, for 1994. The special retirement program was offered during the first half of 1995 to achievedesired workforce reductions corresponding with the lower production rates and majorprocess improvement initiatives. Approximately 9,500 employees – 9% of total employees –accepted the early retirement offer. Funding of the program will occur over a minimum of tenyears through the Company’s retirement plan and will not have a significant impact on annualcash flow. The overall operating profit margin, exclusive of research and development expenseand the special retirement program expense, was 11.1% for 1995 compared with 13.0% for1994. The lower overall operating profit margin was primarily attributable to Defence andspace segment sales being a higher percentage of total sales (28% in 1995, 23% in 1994) andthe commencement of 777 jet transport deliveries together with fewer deliveries of all othercommercial aircraft models. The overall profit margin before research and developmentexpense for the Defence and space segment is normally lower than for the commercialaircraft segment. With regard to the 777 program, new jet transport programs normally havelower operating profit margins than established programs due to initial tooling amortizationand higher unit production costs in the early years of a program. Significant efficiencies have been gained through process improvements, but thecommercial jet transport market remains extremely competitive, resulting in continued pricepressure. The Company will continue to pursue major productivity gains to help ensure thatits favourable market position is maintained at acceptable profit margins. The diversified programs of the Defence and space segment continue to demonstratesolid technical and cost performance. The Defence and space segment operating profitmargin was 6.6% in 1995 exclusive of the special retirement program expense, comparedwith 6.0% in 1994. Although the operating profit margin associated with the Company’s 7
  11. managing role for the Space Station program is relatively low (due to fee structure forsubcontracts), favourable performance was recognized on other programs in 1995.Net earnings: Figure 4 Net Revenue (Boeing)Net earnings of $856 million for 1994 were $388 million lower than in 1993, primarily due tothe fewer commercial aircraft deliveries, a higher level of research and developmentexpenditures, increased debt expense, and lower corporate investment income. These factorswere partially offset by improved Defence and space earnings and a lower effective federalincome tax rate. Although commercial aircraft sales levels were down substantially in 1994relative to 1993, the combined operating profit margin on commercial aircraft programs,before research and development expenditures for new and derivative models, wasmaintained through efficiencies gained by process improvements throughout the segment’soperations. The lower effective federal income tax rate in 1994 was principally due to therecognition of a research and experimentation tax credit of $60 million in 1994, whereas noresearch and experimentation credit was recognized in 1993. Figure 5 Expenditure on R&D 8
  12. Research and development expenditures charged directly to earnings include design,developmental and related test activities for new and derivative commercial jet transports,other company-sponsored product development, and basic Defence and space research anddevelopment not recoverable under U.S. Government flexibly priced contracts. Research anddevelopment associated with new commercial models and derivatives was maintained atrelatively high levels over the past three years even though sales were declining during thisperiod. These substantial investment levels are helping to ensure the Company is wellpositioned to meet future commercial airline market requirements. The principal commercial developmental program during the 1993–1995 time periodhas been the new 777 wide-body twinjet. During 1993, the 777 development programtransitioned from primarily structural and systems design activities to primarily systemsintegration and test activities. Flight testing of the Pratt & Whitney-powered 777 began inmid-1994, and continued through the first half of 1995. Flight testing of General Electric-powered and Rolls-Royce-powered 777s continued through 1995. Other commercialdevelopment programs in 1994 and 1995 included the 777-200ER extended-range version ofthe 777, the 737-600/700/800 next-generation 737 family, and a freighter version of the 767.Additionally, in 1995 development efforts commenced for the larger capacity 777-300. The Defence and space segment plans to selectively pursue commercial-type businessopportunities where it can utilize its technical and large-scale integration capabilities. Suchbusiness pursuits, which are outside the traditional U.S. Government contractingenvironment, may require increased levels of research and development expenditures for theDefence and space segment over the next few years. Total research and development expenditures for 1996 are currently projected to be inthe $1.2 billion range. Research and development activities are discussed further in theStrategic Investments for Long-Term Value section. Essentially all of the Company’sbusiness is performed under contract, and therefore operating results trends are notsignificantly influenced by the effects of inflation. Additional information relating to salesand earnings contributions by business segment can be found in Note 18 to the ConsolidatedFinancial Statements. Statement of Financial Accounting Standards No. 123, Accounting forStock-Based Compensation, becomes effective in1996. The Company does not plan to adoptthe expense-recognition alternative for stock options as permitted by the standard.3.3 Contractual Backlog Total contractual backlog of unfilled orders at December 31, 1995, was $72.3 billion,compared with $66.3 billion at the end of 1994. Of the total 1995 backlog, $66.5 billion or92% related to the commercial aircraft segment, compared with $60.6 billion or 91% in 1994.Not included in contractual backlog are purchase options and announced orders for whichdefinitive contracts have not been executed. Commercial backlog includes orders fordeliveries that extend several years into the future. Approximately 30% of the commercialaircraft backlog units are scheduled for delivery beyond 1998. 9
  13. Figure 6 Backlogs (Boeing) U.S. Government and foreign military backlog is limited to amounts obligated tocontracts. Unobligated contract values not included in backlog at December 31, 1995 and1994, totalled $7.6 billion and $5.9 billion.4.1 State of competition in the industry During the 1980s and 1990s, Boeing and Airbus invested heavily in new airplanes tobroaden their product lines. In 1982, Boeing made its first deliveries of two entirely newairplane models, the wide-body 767 and the narrow-body 757. It also developed newderivatives of the 737-200, with first deliveries of the 737-300 in 1984, the 737-400 in 1988,and the 737-500 in 1990. Boeing also developed the all-new twin-engine wide-body 777,with the first customer deliveries in 1995. The 737-600/700/800, comprising the latestgeneration of the 737 family of airplanes, were all scheduled for initial deliveries during1997-1998. Airbus made its first deliveries of the wide-body A310-a derivative of the A300-in 1983. It also developed its first narrow-body airplane, the A320, with first delivery in1988. Its new twin-engine A330 and four-engine A340 wide-body airplanes entered servicein 1993. Airbus also developed derivatives of the A320, with the stretched A321 firstdelivered in 1994, and the shortened A319 in 1996. In contrast, the only new McDonnell Douglas airplane introduced during the decadeof the 1980s was first delivered in 1980: the MD-80, a narrow-body derivative of the DC-9that ultimately achieved sales in excess of 1000 airplanes. During the 1990s, McDonnellDouglas delivered only two new airplanes: the MD-11, a three-engine wide-body derivativeof the DC-10, and the MD-90, a narrow-body derivative of the MD-80. A third airplane, theMD-95-a smaller derivative of the MD-90, was scheduled for delivery in 1999, but its onlycustomer was ValuJet Airlines (now AirTran Airlines), a struggling start-up airline. The lackof additional orders created great uncertainty about the future of the MD-95 program. At the end of 1996, when the merger agreement between Boeing and McDonnellDouglas was signed, the shares of undelivered order backlogs were as follows: McDonnellDouglas (8% of the total), Boeing (60%), and Airbus (32%). While Boeings share remainedrelatively stable during the 1990s, Airbus grew significantly, largely at the expense of 10
  14. McDonnell Douglas. As of 1996, McDonnell Douglas share had declined to a levelcomparable to that of Lockheed in the late 1970s and early 1980s, when Lockheed took alarge write-off and decided to exit from the commercial jet airplane business.4.2 Background of the Merging Despite the steady growth in traffic after 1991 most airlines hold back their newaircraft orders even though World air travel has been steadily increasing at an average annualrate of 5%, including in 1994 (with the exception of the year 1991 due to the Persian Gulfconflict). This is mainly due to their depressing financial performance, resulting in dramaticreductions in aircraft manufacturers’ backlogs. For instance, Air France cancelled $500million in orders from Boeing and Airbus in January 1995. Boeing, Airbus Industry andMcDonnell Douglas were major manufacturers dominating the commercial jet aircraft marketwhose market estimate is given by the below table. Company 1994 Sales in $m 1994 Earnings in $m Market Share % Boeing 16,851 1,022 62 Airbus Industry 8,000 N/A 24 McDonnell Douglas 4,760 40 14 Table 1: Revenues and market share of jet aircraft industry leaders. . Former Soviet Union and other minor players, such as British Aerospace, Fokker andmanufacturers of short haul, turboprop engine commuter planes were not included in theabove market estimates. The situation in 1994 alarmed significantly as there is no indication of recovery is inprospect for 1995. Worldwide shipments of aircraft dropped sharply from 3189 units to 2402.Boeing registered a decline of 14% in its revenues compared to 1993, and McDonnellDouglas lost market share with its revenues shrinking by 9%. Due to a severe shortage oforders, McDonnell Douglas was in a position to halt temporarily and perhaps permanently themanufacturing of its wide body MD-11 plane. This may leave for the long term only Boeingand Airbus competing in the long haul, wide body carrier segment. The struggle between thethree vendors seems to develop at the clear disadvantage of McDonnell Douglas. McDonnellDouglas faithful customer SAS (Scandinavian Airlines System) whose 70% of fleet was 11
  15. Douglas, gave preference to Boeing for 35 new B737-600s over the MD-95, a new modelthat Douglas was counting on SAS for its market launch.The following table summarizes the new orders received by the three manufacturers in 1994. Company Gross Orders Cancellations Net Orders Boeing 120 46 74 Airbus Industry 125 54 71 McDonnell Douglas 23 19 4 Table 2: New Aircraft Orders in 1994 Although Boeing had a backlog of 959 units versus Airbus’ 615, if that trendcontinued, Airbus would soon be in the number one position. In 1994 it looks like Airbus isabout to catch up with Boeing in market share, while McDonnell Douglas has furtherreceded: Indeed Airbus claimed it obtained “nearly 50% market share” in 1994’s orders fornew aircraft of more than 100 seats. The industry is very capital intensive; it requires a long time to recoup investmentscharacterized by long development cycles. It needs a large base of skilled workers, high techsustaining industries and sophisticated and demanding customers to thrive. Governmentintervention, different countries’ industrial policies and international trade relationships playalso a major role in shaping the industry forces. The aerospace industry in which Boeing and McDonnell Douglas compete is one offierce competition and severe cyclical swings. A record number of mergers and acquisitionshave occurred over the past two years, largely due to the competition, volatility, and variousother determinants. More than 10,000 mergers have taken place this past year alone,including over $660 billion changing hands.5.1 Key competitive strategies used by the three big players  Extensive aircraft portfolio to meet the desires of customer airlines across the world. Boeing is the best stood with aircraft capacity ranging from 100 passengers (737-500) to 500 (747-400). Airbus had entered the market with small and medium sized carriers, but is grasping up with the introduction of its four engine long haul A340 aircraft. Only McDonnell Douglas relegated to the low end small carriers (MD-80 and MD-90) as its facing the failure of the MD-11 tri-jet.  Introducing high technology, electronic fly by wire techniques in order to reduce the number of pilots needed from three to two and establishing easy transmission from one type of plane to another, thus reducing training time by developing the family 12
  16. concept. For instance, Airbus succeeded in obtaining approval from the FAA to have a single pool of pilots to operate its A320, A330 and A340 models.  Developing solutions to improve cost effective exploitation of their planes, for example general trend in migration to twin engine wide body planes, achieving fuel efficiencies and quick reconfiguration of seating layouts to optimize the ratio of seat occupancy by passenger class.  Leasing and financing services to customers. As airlines face financial difficulties, financing terms become a key selling factor. All three competitors run financial services. In 1993, for instance, Boeing’s customer financing activities amounted to $3,177 million, up from $2,295 million while its sales went down to $20,568 million from an all-time high of $24,133 million in 1992. Airbus is also financing itself 5- 10% of its sales.  Alliances, joint ventures especially with foreign government funded programs and extensive lobbying, political posturing in national and international forums. “Some 45 businesses in 6 Asia- Pacific Economic Cooperation (Apec) economies provide Boeing with about 70 different parts and major assemblies...”6.1 Factors influencing the merging Figure 7 Porter Competitive Model for the Commercial Jet Aircraft Industry The Porter model provides a structural analysis of the aircraft industry. It defines allthe competitive forces in the market, existing alliances, potential threats and other sources ofpositive and negative influence. 13
  17. 6.1.1 Buyers The buyers, mainly airlines and leasing companies detain considerable power that isincreasing since there is a downturn in orders. As the airlines optimize their operations andcut their investments, the competition among the suppliers becomes deadly. It can also beassumed that the regulating bodies are buyers as well as suppliers. Indeed, the aircraftindustry has to constantly deal with these institutions to convince them to approve regulationsin their favour and not take decisions that would jeopardize their competitive positioning.6.1.2 Suppliers The suppliers can be split in two different groups, based on their relative bargainingpower; Engine manufacturers represent the single most significant group of suppliers and itcan be assumed that their bargaining power is going to significantly increase as they undergoconcentration. General Electric, Pratt & Whitney (US), Rolls Royce (UK), CFM (Europe) arethe main competitors. However, this power is somewhat balanced by the fact that oftentimesairlines enter in separate negotiations with the engine suppliers to determine the choice of theengine for their planes. Planes are usually designed for more than one engine type. On theother hand, the required fuel efficiencies, increased reliability needs—especially for twinengine transatlantic wide bodies—and the need to provide more power for the new large bodyaircraft require aircraft manufacturers to enter in joint development programs. Regulating bodies, such as the FAA, EPA, etc., may be considered as suppliers to theindustry as they determine a number of constraints that the industry has to deal with. Thebargaining power of these institutions is considerable as they can create major obstacles forthe final approval of the planes. As the industry is extremely capital intensive, all sources ofinvestment and financing detain considerable power. A recent trend is the development offinancing and leasing companies who buy planes from the manufacturers, then lease them tovarious airlines. ILFC (International Lease Finance Corp) is one such company that recentlyordered 30 Airbus aircraft. Meanwhile Airbus Industry itself has formed its own financingservice which has access to more than $1.5 billion revolving credit facility from 46 differentbanks. We anticipate that on the avionics and materials side, since the military markets keepshrinking and there is heavy pressure on defence suppliers to move to commercialapplications, the bargaining power of these industries as they fight for additional share of thecommercial market is at the advantage of the aircraft industry.6.1.3 New Entrants At first look, any new entrant in this market faces a steep, uphill battle. Regulations,capital requirements, extremely skilled labour needs and sophisticated support industries,necessary proven track record and the perspective of a long wait to reach profitability are buta few of the very high barriers to entry. However, one cannot completely exclude thispossibility. Just as Europe did, Japan or China may decide that this industry is strategicallyvital for their long term wellbeing and encourage a highly subsidized entry in the market bytheir national champions. In the case of Japan, subsidies may even not be necessary as thesophisticated industrial infrastructure and naturally protective trade policies may very wellencourage Mitsubishi or another firm to engage in the battle. 14
  18. The former Soviet Union represents a significant growth potential for the big three,but also has its own national aircraft industry. While this market may be open to competition,it also possible that the Russian Tupolev enhances its capabilities, rationalizes its operationsand succeeds in entering the market with a low cost, no frills product strategy, especially inemerging countries. Finally, although highly unlikely, existing defence aerospace companiesmay be tempted by a late entry or re-entry such as Lockheed as they see their traditionalmilitary market dwindle.6.1.4 Threats of Substitute Products or Services It is difficult to imagine, for the foreseeable future, a direct substitute for commercialaircraft, especially in the long haul transport. Air travel is the most effective, secure,convenient and economic transportation method. However, a few threats exist, especially inthe low end: Fast bullet trains offer between cities less than 400 miles apart a very attractivesolution. As their speeds approach and exceed 200 mph, they bring such travel below twohours from downtown to downtown; a performance that hardly any airline can match. Afterthe start of TGV service between Paris and Lyons, Air Inter faced a 50% reduction in airtravel between the two cities. If such solutions are implemented widely in the USA—a veryspeculative assumption—between, say San Francisco and Los Angeles for instance, a greatmany airlines may lose market share and as a consequence reduce their fleets. Likewise, advances in automotive industry, such as cars capable of very high speeds,under electronic control on specially equipped freeways may have an impact on air travel.Finally, advances in telecommunications techniques, collaborative computing, desktop video-conferencing based on broadband ISDN type services may reduce business travelrequirements and impact the airlines’ investment in new planes and routes.6.1.5 Globalization of the Commercial Aircraft Industry There are very few players, but intense competition and very high capitalrequirements drive the need to maximize volume and tap all possible markets. It isunthinkable to have a national or regional strategy and expect to succeed in this industry. Asmany customers including various governments across the world consider the aircraftindustry strategic, they want a share of the action. As a consequence, partnerships, jointventures are aplenty. In fact such deals, mergers and joint ventures become a must in order toremove trade barriers.7.1 Boeing & McDonnell Douglas Merger Meetings and talks about making this merger a reality began three years ago betweenthese two stellar companies. At the time, neither one could agree on the underlying decisionof setting a fair price. Although, time brought forth many changes for each company, andstarted the wheels turning. 15
  19. 7.1.1 Boeings View Boeing has gone through periods of high demand making airplanes for WW II, to adepressed commercial market where they were forced to cut employment by two-thirds, tothe period where they are now. There were two enormous factors that impacted Boeing’scurrent condition: deep cuts were being made in defence spending and solid growth wasexpected on the commercial side largely due to growth in air travel in the world’s emergingmarkets. Obviously this heavily favoured Boeing because of their 80% commercial and 20%defence outlay. Although these factors heavily favoured Boeing’s make-up, Boeing was stillconcerned with the severe cyclical swings that the commercial market faces.7.1.2 McDonnell Douglas’s View McDonnell Douglas was seeing things from a much different perspective than that ofBoeing. A fundamental problem was quickly growing to place McDonnell Douglas in a verybad position. McDonnell Douglas made two-thirds of its revenues and almost all of itsearnings from defence products, but defence spending was drastically shrinking. This was abased more on information and intelligence. At the same time the defence market wasshrinking, the commercial market was expanding worldwide. The problem here was thatDouglas Aircraft was steadily losing market share to Boeing and Airbus. McDonnell Douglas faced a series of rapid-fire blows to both the civilian and militarysides of the company to cast a large amount of doubt on the prospects of the company(Bryant, D14). First, their ValuJet order came into question after the crash of Flight 592.After this incident, the company failed to interest any other buyers in the MD-95. Next, inOctober, the company scrapped the plans to develop a big new long-range jetliner, the MD-XX, because of prohibitive costs. This was the first time that McDonnell Douglas had everabandoned the top of the airliner market. In November, the Department of Defence eliminated them from contention for acontract to build the Joint Strike Fighter combat aircraft to serve all branches of the UnitedStates military. The company regarded this project as a key to the company’s future as amilitary plane maker since the contract is potentially worth $750 billion or more. McDonnellDouglas was beat out of contention by Boeing and Lockheed Martin. Later in November, oneof McDonnell Douglas’s best customers, American Airlines, made a statement that they willplace all new airline orders with Boeing. The final straw occurred at the beginning ofDecember when McDonnell Douglas made a deal with Boeing to develop wide bodycommercial jets jointly. The question left for McDonnell Douglas management was “will webuy or be bought” (Whitford, 98).7.2 The Deal The primary problem with completing the deal in the past was the decision about theprice. Both sides agreed that things would have to change before they could go any further,and those changes did occur. By the end of 1996, Boeing’s orders for new aircraft were up,the backlog was rising, and more than 12,000 laid-off workers were called back to work(Bryant, 98). On the other hand, McDonnell Douglas was heading in the opposite directionwith their dying commercial side, and the setbacks on the military side. McDonnell Douglas 16
  20. was in a critical stage where they were seriously considering the purchase of the defencedivisions from General Motors, Texas Instruments, or both. That is when CEO of Boeing,Phil Condit, called McDonnell Douglas’s CEO, Harry Stonecipher, to meet about a possiblemerger. In less than one hour, the two CEO’s sketched out a rough agreement. Under termsof the contract, McDonnell Douglas shareholders will receive 65 shares of Boeing commonstock for each 100 shares of McDonnell Douglas common stock. The deal is estimated to beworth approximately $13.3 billion, but the transaction is subject to approval by theshareholders of both companies and certain regulatory agencies. The merged company will have approximately 200,000 employees which include therecent Boeing merger of Rockwell aerospace and defence units. It will operate with estimated1997 revenues in excess of $48 billion, making it the largest integrated aerospace company inthe world. The company will retain the formal name of The Boeing Company, and willremain to be headquartered in Seattle. The company will operate in three major locations: St.Louis, MO, Southern California, and the Puget, Washington. Phil Condit will be Chairmanand Chief Executive Officer, and Harry Stonecipher will be President and Chief OperatingOfficer of the merged company. Two-thirds of the new board will be drawn from the currentBoeing board, while one-third of the new board will be drawn from the current McDonnellDouglas board.8.1 Effects of Merger The effects of the merger are going to encompass several different aspects of theindustry. First, the merger is going to affect Boeing and McDonnell Douglas directly. TheBoeing Company is now going to enjoy much new efficiency due to the addition ofMcDonnell Douglas. A synergistic effect of combining the two companies is the firstefficiency improvement. By adding McDonnell Douglas, Boeing solidifies itself as thenumber one commercial airline company and jumps to the number one position in defencesince that was the strength of the McDonnell Douglas Company. The McDonnell Douglasaddition enhances Boeing’s commercial lines while drastically improving their defenceexpertise. On the cost side, they synergies include facilities rationalization, research anddevelopment, business systems, and material purchasing. The merged Boeing Company believes the potential cost reductions could reach asmuch as $1 billion a year. The second way that this merger increases efficiency is by it fillingthe gaps of both companies while at the same time eliminating duplication and redundancies.Many of the gaps that are being filled include the facilities and manufacturing capacity to fillthe Boeing backorders. The management of the Boeing Company will also improve with the addition of thehighly skilled McDonnell Douglas employees. In these ways, the new improved BoeingCompany is going to be much more efficient. The mammoth size of the firm is going to beone area to watch for in-efficiency because of the massive number of workers and facilities.The merger basically brought the number one commercial airplane company together withone of the best defence companies to form a colossal giant in the aerospace industry. Theflow of communication will be a key to the company’s success. The second way to look at the merger is how it affects the other competitors. In thedefence industry, the merger places the Boeing Company in the number one position pittedagainst the number two defence company of Lockheed-Martin. The primary difference is thatLockheed Martin has moved heavily into electronics, while Boeing must now try to build thatbusiness from within. The merged Boeing does have several advantages too though. For 17
  21. instance, Seattle-based Boeing and McDonnell Douglas of St. Louis together command morethan 60% of the world market for large commercial jetliners. In the commercial airlineindustry, Boeing’s in the number one position again against Airbus Industry, the Europeanconsortium. Boeing’s merger is placing even more pressure on Airbus Industry to get theirfour partner companies to turn their now loose consortium into a centralized company inorder to boost efficiency. Most companies aren’t worried about the massive new company that is nowoverwhelming in size to all of the others. A way to handle the change to fewer companies issimilar to China’s preference of splitting up contracts to even out the competition whichwould now help or favour Airbus. Customers thinking similar to China will also split up theirorders between companies to keep competition fierce, and prevent a monopoly or powerfulduopoly from forming. A similar worry-free feeling stirs because of feelings aboutMcDonnell Douglas. Many of the customers agree that McDonnell Douglas was no longer athreat, and hasn’t been a threat for a long time. This sudden merger decision between Boeingand McDonnell Douglas has placed the remaining defence/aerospace companies in a bind.Mergers are expected between Northrop Grumman and either General Motors defence unit,Texas Instruments defence unit, or possibly even both. No-matter what the combination, itwill not stack up against the power and experience that the new Boeing Company willpossess. Many officials like the merger activity in this industry because they feel that it iseasier and less expensive to keep a couple of strong powerful companies going that canhandle anything, than several small companies that are only specialized.8.2 Potential competitive concerns about the merger The main competitive concerns about the proposed merger of Boeing and McDonnellDouglas arose from the premerger and postmerger structure of the commercial jet airplanebusiness. Here was a multibillion-dollar industry that provided crucial input airplanes to theeven larger worldwide air transportation industry. There were only three major competitorsand a long-term record of exit from the industry. Potential entrants faced high barriers, andthe only successful entrant in the last 30 years-Airbus-had required substantial, long-termfinancial support from European governments and aerospace companies. Moreover, evenwith its sales successes, Airbus had yet to generate a competitive return on its massiveinvestment. In this context, a merger that would shrink the number of competitors from threeto two clearly called for careful scrutiny.The technology and economics of the industry, as well as its history, indicated that thecommercial jet airplane business necessarily would have only a small number of competitors,but that coordinated behaviour among the rivals was quite unlikely. The appropriate mergeranalysis therefore focused on the following three questions:Was McDonnell Douglas currently a significant competitive factor in the industry, i.e., did ithave a significant effect on the prices or product characteristics of the airplanes purchased byairlines or leasing companies?If not, was there any plausible scenario that would transform McDonnell Douglas into asignificant competitive factor in the industry?If not, would the combination of Boeing and McDonnell Douglas enhance the position of thecombined entity so as to harm competition in the industry? 18
  22. If the answers to all three questions were no, it would mean that McDonnell Douglas wasneither a current nor prospective competitive force in the industry, the merger would notenable Boeing to engage in anticompetitive behaviour, and there would be no antitrust policybasis for blocking the proposed merger. During the course of the FTC and EC proceedings,these questions (and many others) were investigated in considerable detail.9.1 Antitrust reviewPROCEDURE AND LEGAL ISSUES Despite the high public profile of this merger, the procedures and standards governingreview were those familiar to United States antitrust practitioners. The primary steps in FTCreview may be summarized as follows:12/14/96: Merger agreement signed;12/116/96: Initial courtesy contacts made with FTC, DOD and NASA;1/9/96 & 1/10/96: Initial substantive meetings accomplished with FTC, DOD and NASA inwhich parties committed to provide all needed documents, information, interviews and whitepapers on voluntary basis with goal of expediting decision process;1/29/97: HSR filing made;2/28/97: FTC Second Requests issued to parties;6/18/97: Substantial compliance with Second Requests acknowledged by FTC; and7/1/97: FTC Commissioners issue joint statement clearing merger, with dissent byCommissioner Azcuenaga. The FTC Statement issued at the close of the investigation best summarizes the resultof its review: After an extensive and exhaustive investigation, the FTC has decided to close theinvestigation of The Boeing Companys proposed acquisition of McDonnell DouglasCorporation. For reasons discussed below, we have concluded that the acquisition would notsubstantially lessen competition or tend to create a monopoly in either defence or commercialaircraft markets. The FTC Statement outlined the reasoning leading to the Commissions decision andemphasized that the decision was reached based upon well-established antitrust principlesrather than a desire to protect Boeing as a "national champion." The Statement observed thatwhile the merger "on its face . . . appears to raise serious antitrust concerns," the Commission"following a lengthy and detailed investigation" concluded that the evidence established that:  McDonnell Douglas no longer constitutes a meaningful competitive force in the commercial airplane market; 19
  23.  There is no economically plausible strategy that McDonnell Douglas could follow that would change that grim reality; and  The merger does not threaten competition in military programs since the companies military programs are not competitive, as affirmed by the Department of Defence in a letter to the Commission. The FTC Statement detailed the extent of the document review, industry interviews,depositions and legal, economic and accounting analyses involved in its investigation;elsewhere, the document demands and production by the parties have been described as themost extensive in FTC merger review history. With respect to legal theory, the Statementexpressly disclaimed any reliance on a failing company or failing division defence andinstead described reliance on what Commissioner Azcuenaga correctly referred to in herdissenting statement as the so-called General Dynamics/diminished competitor defence. Interestingly, the FTC Statement also dealt in passing with the Boeing exclusiveairline requirements contracts that were to become such a controversial aspect of the ECmerger review. The Commission observed that while these 20-year exclusives foreclosedonly about 11% of the market for new commercial jet airplanes, they were sufficientlytroubling in their implications for the future that the FTC intends to monitor the potentialeffects of these and any future contracts of this sort. Most significantly, however, it isapparent from the statement that these exclusive contracts were viewed by the Commission asa separate issue for analysis, rather than issues that should affect the Commissions decisionas to whether the merger should be challenged. As discussed below, this was in markedcontrast to the9.2 Substantive issues: FTC vs. EC The FTC was persuaded that McDonnell Douglas was no longer an effectivecompetitor and had dim prospects of becoming one. The closest substitute for a Boeingairplane was one from Airbus-not McDonnell Douglas-so there would be no increase inmarket power as a result of the merger. The FTC came to understand that a divestedMcDonnell Douglas commercial airplane business would likely fail as an airplanemanufacturer and would simply "milk" the spare parts business at the expense of itscustomers. In contrast, the EC began with the assumption that Boeing was a dominant firm.While it also came to recognize that McDonnell Douglas was no longer viable, it still viewedany aspect of the proposed merger that enhanced Boeings position as anticompetitivebecause it created a relative disadvantage for Airbus. This explains the specific concernsvoiced by the EC and the undertakings it eventually obtained from Boeing, i.e., nowithholding of support for McDonnell Douglas airplanes to influence new airplane sales, noexclusive contracts with airlines, mandatory licensing of government-funded patents, andperiodic reports on government R&D projects. There are important reasons why one might not be able to generalize from the ECshandling of the Boeing/McDonnell Douglas merger. First, it is hard to imagine a moreobvious symbol of European unity and cooperation than Airbus. Second, Europeangovernments and government-owned companies have poured billions of dollars of taxpayermoney into Airbus over the course of decades. It would be naive to believe that a mergerreview process conducted by the EC could ignore the impact of the proposed merger onAirbus. Third, it is possible that the widespread criticism of the ECs handling of this merger 20
  24. may lead to some modification in approach by the European antitrust authorities in the future,including a diminished role for political considerations. The authors do not feel qualified toventure a prediction. Nevertheless, there is a history of philosophical differences between the Americanand European approaches to antitrust policy. Again at the risk of oversimplification, the longtradition of American antipathy toward cartel behaviour and a concern for the public asconsumers can be contrasted with what appears to be a European sympathy (or at least sometolerance) for certain types of government-supported restrictions on competition and aconcern for the public primarily as employees. Therefore, arguments that a merger enhancesefficiency will probably carry little weight in Europe, since such mergers create relativedisadvantages for competitors and usually lead to job cuts. In addition, structural characteristics of an industry-particularly market shares arelikely to be the focus of the European analysis. Undue importance may be attached toHerfindahl Hirschman indexes (HHIs), thereby leading to disputes over market definition thatonly the lawyers and economists involved would view as a productive use of resources.Finally, it is the authors impression that the threshold for what is considered "economicevidence" can be quite low in Europe by comparison to the standards applied by UnitedStates antitrust agencies. This observation is not intended to encourage such an approach, butmerely as a warning that the "economic evidence" one may confront from opponents in thecontext of an EC merger review must be taken seriously despite how it might be viewed in aUnited States agency merger review.9.3 Resolution of merger review9.3.1 FTC approval Despite the massive nature of the FTC investigation, the merger ultimately wascleared without condition based upon conclusions that reasonably closely match the theory ofreview espoused by the parties in presentations to the FTC. Fortunately, for purposes ofunderstanding and analysis of the basis for the result, the Commission chose to take theunusual step of issuing a statement describing the reasoning on which their decision not tochallenge the merger was based. The authors believe that many antitrust practitioners wouldencourage more extensive resort to this practice by the FTC in order to make more accessiblethe reasoning behind antitrust agency decisions on merger regulation that now are largelyknown only in part by the parties, lawyers and economists involved in each individual mergerreview.9.3.2 EC approval and Boeing undertakings The ECs analysis and ultimate decision clearing the merger are reflected in twodecisions-one confidential and the other public. The first contains the Commissions tentativeanalysis forming the basis for its full-scale investigation. The second recites theCommissions analysis of competitive difficulties with the merger, the undertakingsnegotiated with Boeing as a condition of clearance, and the conclusion that based upon theseundertakings the merger was cleared. 21
  25. Pursuant to the undertakings required in order to obtain EC clearance of the merger,Boeing agreed to commitments that can be summarized as follows: Boeing agreed for a period of 10 years to maintain Douglas Aircraft Company (DAC)in a separate legal entity and to supply to the Commission an audited report describing thebusiness performance for continued DAC activities. Boeing agreed to provide the same high quality level of customer support for DACaircraft as for Boeing aircraft and not to withhold or threaten to withhold such support oraccess to spare parts in order to influence new airplane sales. Boeing agreed not to enter into any additional exclusive airplane supply agreementsuntil 8/l/2007, unless required to meet competition. Boeing agreed not to enforce its exclusivity rights under the agreements withAmerican, Delta and Continental. Boeing agreed to license on request and on a nonexclusive, royalty-bearing basis anygovernment-funded patent that could be used in the manufacture or sale of commercial jetaircraft, and related know-how necessary to exploitation of the patent. Boeing also agreed tosimilarly license any blocking patent and related know-how as described above to anotheraircraft manufacturer that agrees to similar terms with respect to its blocking patents. Boeingagreed to provide information on non-classified, government-funded research anddevelopment projects so as to provide increased "transparency" with respect to informationpertinent to the government bilateral treaty on aircraft manufacturing subsidies. Boeing agreed not to exert undue influence on its suppliers in order that the suppliersshould refuse to deal with other aircraft manufacturers as described more fully in theundertakings portion of the decision.10.1 ConclusionThe Boeing - McDonnell Douglas merger is definitely one that makes a very loud statement.It combines two companies who were both leaders in their respective specialties, andsimultaneously capitalized on utilizing each other’s strengths to develop a company that willstand out as the best world-wide. Within the one short hour that the decision was made, oneof the greatest aerospace companies of the world was created. The much efficiency thatoccurs because of this merger is a definite sign of why this merger is a good event for thecompany and the industry. The effects of this merger on Boeing’s competitors show anexample of what shear power and dominance this company already possesses. Boeing isproving to all that it plans on leading others into the future rather than following on thecoattails of others. The Boeing – McDonnell Douglas merger is one that was driven by globalforces, consolidation, changing economics of the defence industry, and many other variables.It was truly a strategic merger. 22

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