Competition, survival are keys to approval Conditions differ in retail, defense fields; Regulation

THE BALTIMORE SUN

So it's OK for big aerospace companies to merge, but not drug stores and office supply shops?

Absolutely, defense experts say. The Boeing/McDonnell Douglas marriage is different from the failed merger attempts of Office Depot and Staples or Revco and Rite-Aid, they say, because of one important word:

Competition.

The Federal Trade Commission found that the retail businesses would suffocate competition if they consolidated. The aerospace field is already so short on competition that gigantic mergers are seen as a matter of survival.

"Drug stores aren't going to go out of business because they fail to merge, whereas it's entirely conceivable that aerospace companies will," said Richard Aboulafia of the Teal Group, a consulting firm in McLean, Va.

Or as Loren B. Thompson of the Alexis de Tocqueville Institution put it, the Boeing merger "merely ratifies a verdict that has already been rendered by the marketplace."

McDonnell Douglas was in trouble. In the FTC's decision yesterday not to interfere with Boeing's acquisition of the company, the panel said it was swayed mostly by the conclusion that virtually no one wants to buy McDonnell Douglas commercial jetliners anymore.

Boeing has 60 percent of the world's commercial aircraft market, and Europe's Airbus Industrie -- which dreads the merger -- has most of the rest.

Even on the domestic military side of the equation, the new Boeing won't change any major areas of competition:

The Pentagon has made plain that it can only sustain two major builders of military airplanes -- Bethesda-based Lockheed Martin Corp. "and someone else. Now it looks pretty clear that that someone is going to be Boeing," said Stuart McCutchan, who publishes a newsletter called Defense Mergers & Acquisitions.

For missiles, neither Boeing nor McDonnell Douglas is much of a player. Raytheon and Hughes -- and, to some degree, Lockheed Martin -- dominate here. And Raytheon happens to be in the process of acquiring Hughes.

Lockheed Martin and McDonnell Douglas build the nation's primary rocket fleets; now it will be Lockheed Martin and Boeing.

Boeing and McDonnell Douglas don't really even participate in the fastest-growing defense market, military electronics. Lockheed Martin, Northrop Grumman and Raytheon are the players there.

"In each individual market, the customer has not seen any real decrease in the number of its suppliers," McCutchan said. "You have to look at it that way. You can't stand back and say, gosh, just because these guys are so big, competition is being thwarted."

Former Pentagon acquisitions chief Paul G. Kaminski, who stepped down in May, has insisted in interviews that the military won't face higher prices from having fewer prime contractors. Competition, he said, will simply be driven down a level, to the subcontractors who supply systems and parts to the big guys.

The theory is that the nation can support only a handful of prime contractors, and those have to be big enough to undertake the Pentagon's dwindling slate of risky and expensive weapons projects.

The prototype supercontractor is Lockheed Martin, which will face a potent new challenger in the bulked-up Boeing. While the Bethesda company still does more defense work than anyone else in the world -- about $19 billion compared to Boeing's combined $17 billion -- Boeing takes over as the biggest aerospace company on the planet.

Lockheed Martin approaches $30 billion in annual sales, but Boeing's more than $40 billion is equal to the combined defense budgets of Canada and China.

What's more, Boeing will have an unmatched balance between boom-or-bust commercial work and prestigious military contracts. That not only stabilizes its bottom line, but opens up some intriguing possibilities.

As the company markets McDonnell Douglas F-18 fighter planes on the international market, for instance, it can sweeten the deal by offering to put a foreign country's factories to work building parts for Boeing 747s.

"That's new and very innovative and will be very, very attractive all over the world," McCutchan said.

Thompson discounts those arrangements, called offsets, as much of a threat to Lockheed Martin, which has a mind-boggling variety of work it can farm out to purchase-minded nations.

Pub Date: 7/02/97

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