SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) July 1, 1997
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McDonnell Douglas Corporation
Exact name of Registrant as Specified in Charter
Maryland 1-3685 43-0400674
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
Post Office Box 516, St. Louis, Missouri 63166-0516
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (314) 232-0232
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INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. Other Events.
On July 1, 1997, the Federal Trade Commission announced that it had closed the
investigation of the proposed merger between a subsidiary of The Boeing Company
and McDonnell Douglas Corporation, concluding that the proposed transaction
would not substantially lessen competition or tend to create a monopoly in
either defense or commercial aircraft markets.
A copy of the press release issued by the Federal Trade Commission on July 1,
1997 with respect to the proposed merger is attached hereto as Exhibit 99 and is
incorporated herein by reference.
EXHIBITS
Exhibit No.
99 Press Release
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
McDonnell Douglas Corporation
(Registrant)
By: /s/ F. Mark Kuhlmann
July 3, 1997 --------------------------------
(Date) F. Mark Kuhlmann
Senior Vice President and
General Counsel
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FOR RELEASE: JULY 1, 1997
FTC ALLOWS MERGER OF THE BOEING COMPANY
AND MCDONNELL DOUGLAS CORPORATION
The Federal Trade Commission staff has closed its investigation of the
proposed merger of The Boeing Company and McDonnell Douglas Corporation.
The Commission has determined that no further action is warranted at
this time.
Chairman Robert Pitofsky and Commissioners Janet D. Steiger, Roscoe B.
Starek III, and Christine A. Varney issued a joint statement.
Commissioner Mary L. Azcuenaga issued a separate statement. Both
statements are attached.
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Copies of the letter closing the investigation and the Commissioners'
statements will be available on the Internet at the FTC's World Wide Web
site at: http://www.ftc.gov (no period). FTC documents also are
available from the FTC's Public Reference Branch, Room 130, 6th Street
and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY
for the hearing impaired 202-326-2502. To find out the latest news as it
is announced, call the FTC's NewsPhone recording at 202-326-2710.
MEDIA CONTACT:
Victoria Streitfeld or Bonnie Jansen
Office of Public Affairs
202-326-2718 or 326-2161
STAFF CONTACT:
William J. Baer
Bureau of Competition
202-326-2932
George S. Cary
Bureau of Competition
202-326-3741
(FTC File No. 971-0051)
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Statement of Chairman Robert Pitofsky and
Commissioners Janet D. Steiger, Roscoe B. Starek III and
Christine A. Varney
in the Matter of
The Boeing Company/McDonnell Douglas Corporation
File No. 971-0051
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After an extensive and exhaustive investigation, the Federal Trade
Commission has decided to close the investigation of The Boeing
Company's proposed acquisition of McDonnell Douglas Corporation. For
reasons discussed below, we have concluded that the acquisition would
not substantially lessen competition or tend to create a monopoly in
either defense or commercial aircraft markets.
There has been speculation in the press and elsewhere that the United
States antitrust authorities might allow this transaction to go forward
- -- particularly the portion of the transaction dealing with the
manufacture of commercial aircraft -- because aircraft manufacturing
occurs in a global market, and the United States, in order to compete in
that market, needs a single powerful firm to serve as its "national
champion." A powerful United States firm is all the more important, the
argument proceeds, because that firm's success contributes much to
improving the United States' balance of trade and to providing jobs for
U.S. workers.
The national champion argument does not explain today's decision. Our
task as enforcers, conferred in clear terms by Congress in enacting the
antitrust statutes, is to ensure the vitality of the free market by
preventing private actions that may substantially lessen competition or
tend to create a monopoly. In the Boeing-McDonnell Douglas matter, the
Commission's task was to review a merger between two direct competitors.
We do not have the discretion to authorize anticompetitive but "good"
mergers because they may be thought to advance the United States' trade
interests. If that were thought to be a wise approach, only Congress
could implement it. In any event, the "national champion" argument is
almost certainly a delusion. In reality, the best way to boost the
United States' exports, address concerns about the balance of trade, and
create jobs is to require United States' firms to compete vigorously at
home and abroad. Judge Learned Hand put the matter well a half century
ago in describing the reasons for the commitment in the United States to
the protection of the free market:
"Many people believe that possession of unchallenged economic power
deadens initiative, discourages thrift and depresses energy; that
immunity from competition is a narcotic, and rivalry is a stimulant, to
industrial progress; that the spur of constant stress is necessary to
counteract inevitable disposition to let well enough alone."(1)
On its face, the proposed merger appears to raise serious antitrust
concerns. The transaction involves the acquisition by Boeing, a company
that accounts for roughly 60% of the sales of large commercial aircraft,
of a non-failing direct competitor in a market in which there is only
one other significant rival, Airbus Industrie, and extremely high
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barriers to entry. The merger would also combine two firms in the U.S.
defense industry that develop fighter aircraft and other defense
products. Nevertheless, for reasons we will now discuss, we do not find
that this merger will substantially lessen competition in any relevant
market.
The Commission reached its decision not to oppose the merger following a
lengthy and detailed investigation into the acquisition's potential
effects on competition by a large team of FTC attorneys, economists and
accountants. The Commission staff interviewed over forty airlines
(including almost every U.S. carrier, large and small, and many foreign
carriers), as well as other industry participants, such as regional
aircraft producers and foreign aerospace companies. Staff deposed
McDonnell Douglas and Boeing officials responsible for marketing
commercial aircraft, assessing their firms' financial conditions, and
negotiating the proposed acquisition. Finally, the Commission staff
reviewed hundreds of boxes of documents submitted by the merging
companies and third parties, such as airlines and aircraft
manufacturers.
With respect to the commercial aircraft sector, our decision not to
challenge the proposed merger was a result of evidence that (1)
McDonnell Douglas, looking to the future, no longer constitutes a
meaningful competitive force in the commercial aircraft market and (2)
there is no economically plausible strategy that McDonnell Douglas could
follow, either as a stand-alone concern or as part of another concern,
that would change that grim prospect.
The evidence collected during the staff investigation, including the
virtually unanimous testimony of forty airlines that staff interviewed,
revealed that McDonnell Douglas's commercial aircraft division, Douglas
Aircraft Company, can no longer exert a competitive influence in the
worldwide market for commercial aircraft. Over the past several decades,
McDonnell Douglas has not invested at nearly the rate of its competitors
in new product lines, production facilities, company infrastructure, or
research and development. As a result, Douglas Aircraft's product line
is not only very limited, but lacks the state of the art technology and
performance characteristics that Boeing and Airbus have developed.(2)
Moreover, Douglas Aircraft's line of aircraft do not have common
features such as cockpit design or engine type, and thus cannot generate
valuable efficiencies in interchangeable spare parts and pilot training
that an airline may obtain from a family of aircraft, such as Boeing's
737 family or Airbus's A-320 family.
In short, the staff investigation revealed that the failure to improve
the technology and efficiency of its commercial aircraft products has
lead to a deterioration of Douglas Aircraft's product line to the point
that the vast majority of airlines will no longer consider purchasing
Douglas aircraft and that the company is no longer in a position to
influence significantly the competitive dynamics of the commercial
aircraft market.
Our decision not to challenge the proposed merger does not reflect a
conclusion that McDonnell Douglas is a failing company or that Douglas
Aircraft is a failing division. Nor does our decision not to challenge
the proposed merger reflect a conclusion that Douglas Aircraft could
maintain competitively significant sales, but has simply decided to
redeploy or retire its assets. While McDonnell Douglas's prospects for
future commercial aircraft sales are virtually non-existent, its
commercial aircraft production assets are likely to remain in the market
for the near future as a result of a modest backlog of aircraft orders.
As a result, it is unlikely that the aircraft division would have
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been liquidated quickly. Moreover, the failing company defense comes into
play only where the Commission first finds that the transaction is
likely to be anticompetitive. Here, the absence of any prospect of
significant commercial sales, combined with a dismal financial forecast,
indicate that Douglas Aircraft is no longer an effective competitor, and
there is no prospect that position could be reversed.
The merger also does not threaten competition in military programs.
Though both Boeing and McDonnell Douglas develop fighter aircraft, there
are no current or future procurements of fighter aircraft by the
Department of Defense in which the two firms would likely compete.
Finally, there are no other domestic military markets in which the
products offered by the companies are substitutes for each other. The
Department of Defense, in a letter to the Commission dated July 1, 1997,
indicated that competition would remain in the defense industry
post-merger.
While the merger seems to pose no threat to the competitive landscape in
either the commercial aircraft or in various defense markets, we find
the twenty year exclusive contracts Boeing recently entered with three
major airlines potentially troubling. Boeing is the largest player in
the global commercial aircraft market and though the contracts now
foreclose only about 11% of that market, the airlines involved are
prestigious. They represent a sizeable portion of airlines that can
serve as "launch" customers for aircraft manufacturers, that is,
airlines that can place orders large enough and have sufficient market
prestige to serve as the first customer for a new airplane. We intend to
monitor the potential anticompetitive effects of these, and any future,
long term exclusive contracts.
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1. United States v. Aluminum Company of America, l48 F.2d 416, 427 (2d
Cir. 1945).
2. Our colleague Commissioner Azcuenaga seems to speculate that these
problems may be the result of "strategic behavior" to avoid government
challenge, and that others in the future may pursue a similar strategy.
Speculation is easy, but there is absolutely no evidence that any such
behavior occurred here.
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STATEMENT OF COMMISSIONER MARY L. AZCUENAGA
in The Boeing Company, File No. 971-0051
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The Commission today announces that it will not challenge the proposed
merger of The Boeing Company and McDonnell Douglas Corporation. I agree
that no action is warranted against the combination of assets in the
defense and space lines of business, which constitutes the greater
portion of the proposed transaction, although I do not join the
discussion of the other commissioners(1) on this point.
I also agree with my colleagues that no action is warranted concerning
the twenty-year exclusive arrangements for commercial aircraft that
Boeing recently reached with three major U.S. airlines. The arrangements
account for an estimated 11% of the market, well below any level that
should be of concern under the laws enforced by the Commission. Given
the state of the law and the fact that the exclusive arrangements
apparently are unrelated to the proposed transaction, what is curious is
that my colleagues choose to mention them at all.
Another aspect of the proposed transaction is the combination of two of
the three remaining manufacturers of commercial aircraft in the world.
Boeing is the largest commercial aircraft firm in the world; McDonnell
Douglas, through Douglas Aircraft Company ("Douglas"), is number three
in the industry. This horizontal combination of two of the three firms
in the market appears to present a rather straightforward case for a
challenge by the Commission. Absent action by the Commission, the merger
will eliminate one of three firms in a highly concentrated market in
which entry is difficult and unlikely.
My colleagues conclude that most airlines will not buy planes from
Douglas, a factual conclusion with a surprising reach for a simple
announcement of failure to prosecute and a conclusion and implication of
competitive insignificance with which I disagree after having reviewed
the available information. It is true that Douglas has a small share of
the commercial aircraft market, but that does not mean that it exercises
no competitive constraint.(2) The evidence shows that Douglas has added
an element of competition at the stage at which commercial aircraft
producers bid for the business of airlines, and it has continued to win
some business.
My colleagues rely in their statement on the so-called General Dynamics
(3) defense, that is, that market shares based on past performance may
overstate a firm's future competitive significance. In General Dynamics,
the government's statistical case based on historical production of coal
was deemed an inadequate predictor of anticompetitive effects in light
of the acquired firm's inability to obtain additional coal reserves. The
company could not compete for future sales, because its coal reserves
already were committed and it could not acquire additional reserves. No
such definitive impediment is present here. Douglas may need more
customers for its products, but having won fewer customers than it might
want does not make Douglas unable to compete for future sales.(4) One
problem with accepting a "flailing firm" or "exiting assets" claim is
that it creates an incentive for strategic action to avoid competitive
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overlaps and government challenge under Section 7 of the Clayton Act.(5)
This is a dangerous precedent when we move from the realm of finite
reserves of natural resources to the more indeterminate realm of
managerial discretion, because of the susceptibility of the defense to
self-serving statements, manipulation and strategic behavior.(6)
After reviewing the available information, I conclude that the
combination in the commercial aircraft market creates a classic case for
challenge in accordance with the merger guidelines, and I find reason to
believe that it would violate Section 7 of the Clayton Act. What is less
clear on the existing information is the availability of an adequate
remedy. On that issue, it seems to me that reasonable people can
disagree but, on balance, I would pursue the matter further.
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1. See Statement of Chairman Robert Pitofsky and Commissioners Janet D.
Steiger, Roscoe B. Starek, III, and Christine A. Varney in The Boeing
Company, File No. 971-0051 (July 1, 1997).
2. In 1996, Douglas obtained orders amounting to "4 percent of the total
narrow-body and wide-body orders received in the commercial aircraft
industry," and its backlog of commercial aircraft orders was $7 billion
at the end of 1996, down from $7.2 billion at the end of 1995. 1996
McDonnell Douglas Corporation Annual Report 30 & 34 (Jan. 1977).
Although the six months since the December 1996 announcement of the
merger with Boeing may not be representative (because one would expect
customers to be chary of placing orders for future delivery given the
uncertainty about the business), Douglas has continued to seek aircraft
business. See, e.g., "Customer Interest Is Renewed as First MD-95 Takes
Shape, Flight International, June 18, 1997; "Jet Leasing Takes Off in
Taiwan; McDonnell To Hold 20% Stake in Venture," Int'l Herald Tribune,
June 20, 1997.
3. United States v. General Dynamics Corp., 415 U.S. 486 (1974).
4. The stringent requirements of the failing firm defense apply to test
whether a firm's imminent failure would, absent the proposed
transaction, cause the firm to exit the relevant market. See 1992
Horizontal Merger Guidelines 5. As I understand it, the parties to the
transaction do not claim that the failing firm defense applies to this
proposed transaction.
5. 15 U.S.C. 18 (barring acquisitions the effect of which "may be
substantially to lessen competition, or to tend to create a monopoly").
6. See Azcuenaga, "New Directions in Antitrust Enforcement," remarks
before NERA 12th Annual Antitrust & Trade Regulation Seminar 11-15
(July 4, 1991).
