The 1997 Boeing-McDonnell-Douglas merger was the work of outgoing Boeing CEO Frank Shrontz. It was a $12 billion stock swap for primarily the defense business because McDonnell’s commercial airplane business was worthless by that point.

It was worse than useless because Boeing assumed all the support and liability for the old McDonnell-Douglas fleet, which became a big headache when Alaska Airlines MD-80 crashed three years later — due to an outdated rudder design that dated from the 1960s. In any case, the defense business was hardly worth $12 billion at that point.

McDonnell Douglas and Boeing Merger

But here’s the bizarre thing about the merger. McDonnell-Douglas was a failed company, believed to be months away from bankruptcy at the time of the merger. Its executives had committed a long string of disastrous mistakes as they squeezed the company for short term profit and refused to invest for growth. Yet, for some reason after the merger, Boeing promoted these executives instead of Boeing’s managers and mostly let them run Boeing. That’s why it was said that McDonnell-Douglas mostly took over Boeing with Boeing’s money.

The Boeing CEO, after Shrontz, Phil Condit, a brilliant engineer, was just not much of a leader and kind of delegated the commercial airplane business to former McDonnell CEO Harry Stonecipher, who took a wrecking ball to it. Stonecipher wasted billions of Boeing money on financial services, leasing, internet — everything but making airplanes. In just 4–5 years, Airbus dominated sales so much that there were industry whispers that Boeing was planning to exit the commercial airplane business entirely and cede a monopoly to Airbus.

Fortunately, Boeing’s Puget Sound leadership led by Alan Mulally (who went on to become Ford Motor CEO) managed to get Stonecipher’s grudging approval for a plan to develop an all-composite plane, the 787, a flight that eventually reasserted Boeing’s technological leadership in this industry.

Before & After

Stonecipher and Condit, who mistakenly thought there was no money to be made in manufacturing airplanes, required that much of 787 development and most of its manufacturing be outsourced, which turned out to be a disastrous mistake when the outside contractors were unable to deliver the components they had promised. The 787 was provided 2 1/2 years late after several billion dollars of cost overruns, mainly because Boeing had to take over work that its outsourcing partners couldn’t execute.

Even today, the 787 is not as profitable as it could be for Boeing because the outsourcing arrangements meant Boeing’s outsourcing partners get paid a large share of the profits. Anyway, looking back, this has to be considered one of the worst mergers of all time. It wasn’t just that Boeing overpaid by billions of dollars — that’s common with mergers. The bigger problem was that the merger caused Boeing to lose its engineering focus and sense of mission and become obsessed with counting money at the very time it faced technological challenges from Europe.

Positive Opinion from the European Commission

The merger of Boeing and McDonnell Douglas received a positive opinion from the European Commission (EC) in Brussels. “This is a significant step toward completing the merger of these two great aerospace companies,” said Boeing Chairman and Chief Executive Officer Phil Condit.

As a condition of clearance by the EC, Boeing agreed to specific terms to address Commission concerns regarding the merger. “By agreeing to the European Commission’s conditions, we took the action we believed was in the best long-term interests of our shareholders, customers, our suppliers and the more than 200,000 employees of Boeing and McDonnell Douglas,” Condit added.

To address the Commission’s concerns regarding potential spillover of benefits from the McDonnell Douglas defense business to the Boeing commercial airplane business, Boeing agreed to license patents obtained under U.S. government-funded contracts to commercial aircraft manufacturers on a non-exclusive, reasonable-royalty basis; to cross-license blocking patents to commercial aircraft manufacturers on a non-exclusive, reasonable-royalty basis; and to supply for ten years an annual report to the European Commission on its current unexpired patents arising from government-funding contracts and on its non-classified government-funded aeronautics research and development projects. Boeing also agreed not to unduly interfere with actual or potential relationships between its suppliers and other commercial aircraft manufacturers.

In response to the Commission’s concerns regarding the acquisition of the McDonnell Douglas commercial aircraft business, Boeing-which intends to provide customer support for existing McDonnell Douglas commercial aircraft at the same high-quality level provided for Boeing aircraft-agreed not to leverage such customer support to obtain any advantage in sales of new commercial aircraft. Boeing also agreed to maintain McDonnell Douglas’ commercial aircraft business in a separate legal entity for ten years and to supply an annual report to the European Commission on the business activities of such commercial aircraft business.

Boeing agreed not to enter into any new “exclusive” supplier agreements with commercial aircraft purchasers until Aug. 1, 2007, except where another aircraft manufacturer has offered such a contract. Finally, although Boeing questions whether the company’s “exclusive” agreements with its U.S. customers should be the subject of demands by the European Commission, to secure merger approval, Boeing further agreed not to enforce the exclusivity provisions in its existing agreements with American Airlines, Delta Airlines, and Continental Airlines. The negotiations remain otherwise unaffected.

Boeing believes that the European Commission should have given more considerable deference to the U. S. Federal Trade Commission, which has original jurisdiction over the merger and which had examined the same facts in its six-month investigation, during which Boeing and McDonnell Douglas submitted more than 5 million pages of documents and the FTC interviewed representatives from more than 40 airlines, as well as other industry participants. On July 1, the FTC approved the merger without conditions.

“Had we proceeded without the approval of the European Commission, we would have potentially faced large fines and potential harm to our customers,” said Condit. “Had we chosen to delay the merger, the resulting uncertainty would have potentially damaged our customers, suppliers, employees, and shareholders.”