The takeover the world was waiting for

Boeing and McDonnell in $45bn merger

Phil Condit, the newly elected chairman of Boeing, was in relaxed mood a week ago as he presided over the roll-out in Seattle of the company's latest 737 jet before an audience of 50,000 employees, suppliers, customers and journalists.

Even when he was asked the by now familiar question - how long will it be before Boeing and McDonnell Douglas do the inevitable and merge - he maintained his composure, praising his rival for its engineering skills, but pointedly failing to give a direct answer.

Now we know why. The following day Mr Condit presided over the most important board meeting in his 31 years with the company - the one that decided Boeing would merge with McDonnell Douglas in a week's time. Though stunning in its scale and ambition, the merger announced yesterday is not therefore unexpected, nor is it without precedent.

The rapid consolidation of the US defence industry since the end of the Cold War has already seen Lockheed and Martin Marietta merge, Northrop combine forces with Grumman and Boeing itself acquire Rockwell. It was only a matter of time before McDonnell Douglas joined the party, as a willing bride or otherwise. Indeed, Boeing and McDonnell Douglas held exploratory merger talks a year ago but they broke down after disagreements on price and the structure of the combined group.

If there was a defining moment in McDonnell Douglas's history it came a month ago when the Pentagon, to everyone's amazement, dropped it from the shortlist of companies vying for the Joint Strike Fighter - a programme worth some $150bn over the next 25 years to build 3,000 fighter aircraft for the US and UK armed forces. Perhaps the newly elected Clinton administration knew something that the rest of us did not because instead of McDonnell Douglas, it chose to give one of the two JSF development contracts to Boeing.

In any event, it would have been a mortal blow to McDonnell Douglas. Its civil aircraft business was already a pale shadow of its former self. Without a presence on the world's biggest military procurement programme the defence arm of the company was going nowhere, either. The merged company will provide tough competition for its US competitors in the defence field, given that the combined product range reads like a roll-call of American military might.

But it is the commercial airliner market where the battle is likely to be fiercest as the combined company takes on Europe's Airbus Industrie which has made huge inroads into Boeing's backyard. The total market over the next 20 years is estimated at some 16,000 jets worth $1,100bn. Between them Boeing and McDonnell Douglas have about 70 per cent of current deliveries.

McDonnell Douglas had already abandoned plans to enter the super-jumbo market with a stretched version of its wide-bodied tri-jet, the MD-11, and attempts to maintain a presence in the narrow-bodied 150-seat sector of the market with the MD-95 were beginning to look doubtful, given that the only launch customer for the jet was the troubled carrier ValuJet.

At a stroke, the merger will give the two US plane makers better economies of scale, an improved pool of technological know-how, greater market penetration and extra financial resource. The first fruit of the merger will almost certainly be the go-ahead for the Boeing 747-500/600 series - a family of 450-550 seater jumbo jets that will cost $7bn to develop. In fact Boeing announced a fortnight ago that McDonnell Douglas was to help it with engineering studies on the new aircraft.

The odds of the deal being blocked on defence grounds are slender given the number of mergers between military equipment manufacturers that have already been sanctioned. But it will be an altogether sterner task persuading the anti-trust authorities that a deal which dramatically reinforces Boeing's stranglehold over airliner deliveries should be allowed to proceed without some stringent conditions. The competitive challenge facing Airbus will be daunting.

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