HIGH FLYING DEAL DECEMBER 16, 1996 TRANSCRIPT

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The Seattle-based airplane manufacturer Boeing has announced plans to acqire archrival McDonnell Douglas for $13.3 billion dollars. The resulting global colossus would unite the world's largest commercial-jet manufacturer with a military-aircraft powerhouse, creating a single giant defense contractor for the U.S. government. The two chief executives talk about the deal that has their stock prices flying high.

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A RealAudio version of this NewsHour segment is available. Online NewsHour links December 16, 1996: The future of research and development. Browse NewsHour coverage of business issues. Browse NewsHour coverage of transportation issues.

CHARLES KRAUSE: The merger announced yesterday between Boeing and arch rival McDonnell Douglas is the largest ever in the aerospace industry. Under terms of the deal Boeing would, in effect, buy McDonnell Douglas for an estimated $13 billion. The new combined company would be the only commercial airplane manufacturer in the United States, its only competitor Europe's Airbus Industry, a European aircraft consortium. The Boeing Corporation, as the new company will be known, will not only be the world's largest commercial plane manufacturer, it will also be the nation's second largest defense contractor. Only the Lockheed Martin Corporation, itself, formed from a merger of defense giants in 1994 will do more defense and aerospace work for the government. Until now, McDonnell Douglas has been known for producing the FA-18 U.S. Navy jet and the F-15 Air Force fighter and will remain the defense contracting arm of the new Boeing Corporation. Together, Boeing and McDonnell Douglas will employ more than 200,000 workers in 27 states. Its defense businesses will be run out of the old McDonnell Douglas headquarters in St. Louis, while the new corporation's corporate headquarters will remain in Boeing's home city of Seattle. The Justice Department and the Federal Trade Commission must approve the deal before it's completed.

JIM LEHRER: Now the two main movers behind this deal, Philip Condit, chief executive of Boeing, and Harry Stonecipher, chief executive of McDonnell Douglas. Gentlemen, welcome. And congratulations. Mr. Condit, whose idea was this, Boeing's or McDonnell Douglas'?

PHILIP CONDIT, Boeing Co.: This has actually been developing over a very long period of time. The two gentlemen who are our chairman, John McDonnell, Frank Schrantz, talked about it three years ago, and Harry and I have talked about it on and off rather intensely actually a year ago, so it's really been both sides.

JIM LEHRER: Do you agree with that, Mr. Stonecipher?

HARRY STONECIPHER, McDonnell Douglas Corp.: Yes, I do.

JIM LEHRER: Who made the first move? Was it McDonnell Douglas who wanted to make a deal with Boeing, or Boeing who wanted to make a deal with you all?

PHILIP CONDIT: The real honest answer is I couldn't tell you. We've worked together enough that it really was sort of a mutual effort on both sides.

JIM LEHRER: Mr. Condit, how was this $13.3 billion figure arrived at? How was the value of McDonnell Douglas to Boeing established, in other words?

PHILIP CONDIT: Well, the first part is actually relatively easy because the stock market tends to value the corporation. The second piece is that we looked at the advantages we could have by putting the two organizations together, what kind of savings could we achieve, and, therefore, what would be the value of the organizations together, and out of that, you arrive at a basic valuation for the company. And, of course, we had to make an offer to McDonnell Douglas. They had to find it fair, just like you would do if you were buying a house, and when buyer and seller can get together on a price, then you've got a deal.

JIM LEHRER: Mr. Stonecipher, was the original offer about what you thought was right? I mean, in other words, how--does this $13.3 billion jibe with what you think the value of your company was?

HARRY STONECIPHER: Well, yes, it is. In fact, we arrived at the number last Tuesday morning rather rapidly, and what we wanted to do is find a ratio, which was .65, that really rewarded our shareholders today but also rewarded Boeing's shareholders in terms of the combined company going forward. So we have a near-term solution and a good pop in both stocks today. And you know it's going to be a high growth company, and so we expect there's good rewards for both shareholders, and that's how you get a fair deal. Both people have to win.

JIM LEHRER: Okay. You mentioned the ratio, the .65 ratio. What that means is that for every piece, very share of stock in McDonnell Douglas, those shareholders will get what, .65 shares of Boeing, the new company, right?

HARRY STONECIPHER: Right. That's exactly right.

JIM LEHRER: Now, why is that fair, Mr. Stonecipher?

HARRY STONECIPHER: Well, I think the market judged it as fair, and when we look at it, we looked at what we might be able to achieve by other methods, whether it be merger and acquisition with other companies, or internal growth, and we thought right here is a ratio at which we can make a deal and be part of really a rapidly-growing company.

JIM LEHRER: Mr. Stonecipher, were you--was McDonnell Douglas looking for "a" deal or only for "a" deal with Boeing?

HARRY STONECIPHER: Well, we obviously have been looking at all the possibilities of a deal because the defense business has been kind of flat to down around the world, and, of course, our commercial business hasn't been vibrant as we would like it.

JIM LEHRER: So you're pretty much getting out of that anyhow, were you not?

HARRY STONECIPHER: Well, we were. We were not intentionally getting out of it--

JIM LEHRER: I got you.

HARRY STONECIPHER: --but we were being driven out.

JIM LEHRER: I got you. By Boeing.

HARRY STONECIPHER: By Boeing.

JIM LEHRER: Okay.

HARRY STONECIPHER: And so when we got to it, we decided that this was best.

JIM LEHRER: All right. And from Boeing's point of view, Mr. Condit, were you looking for any deal, or just a deal with McDonnell Douglas?

PHILIP CONDIT: We had a long-term, strategic focus that said what we were really interested in was balance in our company. We've been heavily commercial. We were about 75 percent commercial, 25 percent defense and space. And we wanted to see that come back a little bit closer into balance. So we were looking for someone who had those attributes. We also wanted it to be relatively horizontal, in other words, somebody who had complimentary kind of skills to ours, and McDonnell Douglas really fit that bill.

JIM LEHRER: Now, Mr. Condit, Boeing was already the No. 1 commercial airplane manufacturer in the world, not only in the United States, but you had already, as Mr. Stonecipher just said, you already ran then out of business, and they were the only other major competitor you had in the United States. Now, we know why this is good for the two of you and your stockholders. Why is this good for America?

PHILIP CONDIT: Well, I think what it does, we play this on a world stage in a global marketplace and to have a strong, capable, competitive aerospace company that can operate globally is good America. We are today the world's--excuse me--the U.S.'s largest exporter. This strengthens that position. It keeps jobs here in the United States to have a strong exporting company, and so it's a win-win for the companies, for the employees of Boeing and McDonnell Douglas and for the country.

JIM LEHRER: Mr. Stonecipher, what about that argument that people say, you know, the whole thing in business has always been the more competition, the cheaper the price, the better the product, or whatever? Now you've got a situation where there's no competition within the United States because of this merger in terms of making big airliners.

HARRY STONECIPHER: Well, I think Phil stated it correctly. When you have to look at airliner production or major capital goods, you look at a world market. You don't just look at a U.S. market. I believe it's the case that really right now 70 percent of Boeing's commercial business is outside the U.S.. And I could tell you that in our case at McDonnell Douglas 50 percent of our current backlog is really outside the U.S., and so this is really a global business. It is not a national business. And for that reason, you look at the broad market.

JIM LEHRER: Mr. Stonecipher, what about the argument that some have made that by the two of you coming together, you're going to eliminate one whole division of research and development, in other words, a whole set of minds will no longer--a separate set of minds will no longer be trying to experiment, trying to find new things to do, both in the aerospace and in the commercial airliner business as a result of this merger?

HARRY STONECIPHER: I don't think that's true at all. All of these people are going to be applied. We've got a rapidly growing business, and that's what's good about the timing of the merger. We can bring these companies together at a point in time when really we need the minds of all of our people. And so we're going to work at that, and there's plenty of research going on and will continue to be?

JIM LEHRER: Do you agree with that, Mr. Condit, that the research is going to go on, is not going to be cut in half as a result of these two companies coming together?

PHILIP CONDIT: No. Our long-term life depends on developing new products, improving our products, finding new technical solutions to problems that our customers have, and so it would be phenomenally short-sighted to say we're going to cut the amount of research we're doing. That is crucial to our future.

JIM LEHRER: Mr. Stonecipher, let's move to the other side, to the defense side, the McDonnell Douglas side of this merger, in other words where your strengths were. What does merging with Boeing do to help that?

HARRY STONECIPHER: Well, they have a great international presence, and they have a presence in a lot of parts of the world where we do not have a big presence, and so merging with Boeing really brings, once again, good balance and a global focus. And so we think it brings that also in terms of products, we end up with a good balance of brand new products to come on line in balance with current production programs. So we have a good balance there and let people choose how fast we go on new programs and how many of the current products that we want to sell.

JIM LEHRER: But here again on the competition side, Mr. Stonecipher, your main customer, at least here in the United States, is the United States Government.

HARRY STONECIPHER: Yes.

JIM LEHRER: Which means the taxpayers of the United States. A competitor has been eliminated through this merger. Does this mean higher prices? What's it going to do to price and product?

HARRY STONECIPHER: As a matter of fact, I think what it means is you have some--a couple of very viable, big competitors. Lockheed Martin is certainly a major competitor in fighter aircraft and a number of other systems, and in a number of other defense systems there are certainly a lot of very viable companies out there that will compete with us in other segments.

JIM LEHRER: Mr. Condit, what's your comment on that?

PHILIP CONDIT: I think that's absolutely the case. The other piece is that since a lot of government contracting is done on the basis of cost, by bringing these companies together, by making savings, which is what our intent is, aiming at something like a billion dollars a year, that gets passed on to the government and, therefore, to the taxpayers in the United States. So I think it's really a positive.

JIM LEHRER: Are you going to have to lay some people off, Mr. Condit, in putting these two companies together?

PHILIP CONDIT: As Harry said earlier, one of the real advantages is we are in a period where our business is actually expanding. Commercial business is going up. We will go almost double in our production over the next year. Some of the military programs--

JIM LEHRER: You're talking about airliners, building--

PHILIP CONDIT: Right.

JIM LEHRER: You're talking about your Boeing 777 airliners and 737 and all of them.

PHILIP CONDIT: Exactly.

JIM LEHRER: Right.

PHILIP CONDIT: Those are increasing. So when your business is increasing, we hired 20,000 people this year, and what this will allow us to do is to redeploy some of these resources and still not have to make major cuts. We'll get the savings because we're in an upturned market.

JIM LEHRER: Mr. Stonecipher, people are--you know, the end result of most mergers is a smaller work force, but you agree with your partner, that's not going to happen this time?

HARRY STONECIPHER: I agree with that. We will have skill mix problems that we'll have to work out.

JIM LEHRER: Skill mix, in other words, people who work for McDonnell Douglas may not be able to do what Boeing--

HARRY STONECIPHER: Not at all. In terms of administrative people that are in the headquarters, we obviously don't need two headquarters, and so we'll start to move people out into the operations, and as long as people are flexible about where they move--

JIM LEHRER: I see.

HARRY STONECIPHER: --then there will be jobs.

JIM LEHRER: Yeah. Mr. Condit, finally, take us into the future a little bit, particularly the airliner future. This is one that touches the average American more than fighter planes does. Is there--what's the current conventional wisdom about what the airliner of the future is going to be? Is it going to be like the ones we have now, only just a little bit faster and a little bit better? What's on the drawing board?

PHILIP CONDIT: I think probably the biggest single thing, we all have visible, but its affect will be very visible, and that is the ability to connect more and more points around the world non-stop, so that instead of having to go through one or two or three stops, you can go direct. That's going to save a lot of time. We're looking at airplanes now that will be able to do the whole Pacific Basis non-stop. I think that's going to have a big impact. The airplanes won't look all that different.

JIM LEHRER: Now, why are you going to be able to do that? What's the change?

PHILIP CONDIT: It's really advancement in technology, particularly in the engine, in the fuel efficiency of the engine, the efficiency of the airplane, itself, that allows for a given amount of fuel to go further. And that just allows us then to build these airplanes to do very long ranges.

JIM LEHRER: Mr. Stonecipher, on the defense side, what--give us a taste, a hint of the future.

HARRY STONECIPHER: Well, I think the future is going to depend, as it always has, on expanding technology. And we will look at it, we'll start looking into unmanned vehicles, and we'll start looking into systems assistance.

JIM LEHRER: You mean, not space vehicles, but even land vehicles.

HARRY STONECIPHER: Even land vehicles, and so it's going to change, and the biggest--the biggest thing to do in that side of the business is called affordability, and I know that we've all heard more bang for the buck our whole life almost, but acquisition reform and a number of things that have happened are really bringing that to reality. And so the people who are able to bring the most bang for the buck are really going to win the business.

JIM LEHRER: All right.

HARRY STONECIPHER: And that's going to be our thrust.

JIM LEHRER: Okay. Gentlemen, thank you for being with us tonight, and again, congratulations.

HARRY STONECIPHER: Thank you.

PHILIP CONDIT: Thank you.

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