Boeing Case Analysis Essay

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Boeing Case Analysis On December 1996, the Boeing Company purchased McDonnell Douglas for a premium of 21% over the price of its stock. This move gave Boeing the opportunity to increase its value by transferring its knowledge across business units, both commercial and defense aircraft. But in the two years after the merger, Boeing’s stock lost one third of its value due to increased inefficiencies and costs associated with the merger. Would this merger really add value to Boeing or would the costs outweigh the benefits gained.

The Aerospace Industry

Commercial Aircraft
The commercial aircraft industry had experienced a significant change during the deregulation of domestic airlines in 1978. The deregulation resulted in an
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· General Agreement on Tariffs and Trade: Limited the amount of government subsidies available to both Boeing and Airbus.

· Airbus Industrie: A consortium of four countries pooling their resources together. Boeing/McDD and Airbus created a duopoly in the industry, characterized by intense competition to increase or protect market share.

Defense and Space

The US government was by far the largest single customer for non-commercial aerospace products and services. This meant that all sales were strongly determined by political considerations. Foreign military sales were determined by foreign policy, while domestic sales were determined by Congress’ debates on the budget. This created a favorable environment because there were neither excessive risks nor volatile changes in market demand. Contracts with the military spanned many years and were paid under a “cost reimbursement” plan starting in the early 1990’s.

On the other hand, the shrinking defense budget led to large-scale mergers and acquisitions among defense contractors and a growing consolidation in the industry. This left only four remaining defense conglomerates, Lockheed Martin, Boeing-McDD, Raytheon and Northrop Grumman. The defense budget stabilized in 1997 at about $250 billion and was expected to increase moderately between 1998 and 2003.

Because contracts for the military and NASA were extremely technically demanding

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