The price was another obstacle. “Harry wanted a very high price,” said Larry Clarkson, one of Boeing’s pivotal figures for several years. “He thought they’d win the first stage of the JSF and refused to acknowledge they might have to take a big write-off on the MD-11.”37
Boeing had looked hard at McDac and twice crunched the numbers. Little, if any, due diligence was done during the initial discussion. Some was done during the second round of talks. Due diligence is a process by which the overall financial status of companies involved in mergers and acquisitions can be established. The practice, which typically lasts several months, extends well beyond checking documents, including annual and quarterly financial reports. It could be described as a search for hidden liabilities, and usually includes a letter of intent that says Company X intends to buy Company Y within a certain period provided there has been a thorough vetting of Company Y’s finances.
Boeing had to be very careful, if only to avoid lawsuits that could have arisen if McDac was shown to have concealed data regarding its assets. But the pairing of Boeing with McDac would be trickier than most such arrangements, partly because Boeing wouldn’t be entitled to examine the Douglas books until the deal was done; otherwise, Boeing would, in theory, have had a competitive advantage. Boeing would have to do due diligence afterward for the usual reason but also to demonstrate to the Justice Department that Douglas was indeed a failed company.
Later, several Boeing executives complained that too little due diligence was done because Condit had been in a hurry to complete the merger without a hitch. At least some of them didn’t know that for a period of more than three years, Boeing’s investment banker, First Boston, had been looking carefully at McDac’s finances. According to Boyd Givan, “only about twelve people in the company were aware of that.”38
There were other considerations, including Airbus, which, like Boeing, was aware that McDac was going to be rescued from itself in one way or another. A purchase of some of McDac’s assets could have given Airbus a manufacturing base in the United States, and some American investment bankers did come to Toulouse to discuss the possibility of Airbus acquiring McDac’s commercial business.
That conversation went nowhere, but Airbus was giving Boeing quite a lot else to think about. Stonecipher says, “We were in talks with Airbus. If the merger with Boeing hadn’t happened, we’d be building Airbuses in Long Beach now.”39
The European Commission could have vetoed the merger, and in doing so triggered a trade war. Boeing avoided a veto by making major concessions, one of which meant giving up an exclusive sales agreement with three of the world’s biggest airlines: American, Delta, and Continental. Although the agreement had, of course, denied Airbus access to these carriers, it didn’t really change anything. None of the three has since bought an Airbus.
After Boeing’s board started urging Schrontz to take McDac off the street, he and McDonnell resumed talking from time to time. In December 1995, Schrontz, Condit, and Woodard met with McDonnell, Stonecipher, and someone else from McDac. The Boeing group continued to feel that the McDac people were asking for a lot more than their company was worth. Moreover, John McDonnell was pushing to have the company renamed the Boeing-McDonnell Company. Schrontz said no to a merger. McDac’s deselection—its failure to make the cut—in the JSF competition reiniforced the prevailing view in Seattle of a failed company, one that could no longer do the things it had once done well.
At about this time, Michael Sears, who was judged one of the two most capable of McDac’s executives (and who would later go to prison for his role in a Boeing defense scandal), was dispatched to Long Beach, his mission to see if the Douglas company stood any chance of once again becoming a player in the commercial aircraft business. (The other executive was Michael Cave, who accompanied Sears to Long Beach and is now general manager of Boeing’s commercial airplane programs.) After several months on the scene, Sears concluded that a new commercial airplane program would require two new models and new wings on two other aircraft. It would be a huge investment, at least $15 billion. McDac couldn’t commit to a number nearly that high. McDonnell called Schrontz again, and the talks resumed; quite clearly, there would be at least some give in McDac’s position.
The Pentagon and the White House strongly favored the merger, partly because they wanted stronger competition for Lockheed Martin. Also, combining Boeing and McDac would appear to confront Airbus with an even more formidable American adversary.
The board chairmen, Schrontz and McDonnell, authorized Condit and Stonecipher to meet and try to narrow differences on the key issues. On the morning of December 10, 1996, the two CEOs met for forty-five minutes in a suite at the Four Seasons Hotel in Seattle. They agreed on a range within which the price to be paid by Boeing would be fixed. And they drew most of the other issues within reach of agreement. Condit was later criticized by colleagues for not having had a lawyer in the room with him.
Four days later, members of Boeing’s board and senior management met in the boardroom in Seattle. Their opposite numbers from McDac met in their boardroom in Saint Louis. Among the Boeing people taking part was C. Gerald King, who was to become the major Boeing figure in the process of making the merger happen. At the time, King was president of the Boeing Defense and Space group. He had gained wide respect in a variety of tough jobs and was seen as a potential successor to Condit. The following is his account of the meeting:
“McDonnell was still pushing for his version of what the company’s name should be. Other issues were the price Boeing would pay and a job in the merged company big enough for Harry. As the talks wore on, the tough issues overhanging the room became the company name and Harry’s job. I spoke up and said, in effect, that Boeing’s name meant everything; that any change would compromise the general view of Boeing’s integrity. Others chimed in saying similar things, but Boeing people were appalled at what might have been a near thing.”
King was referring to what had been a sign of some give in a few board members’ resistance to changing the company’s name. Boeing lawyers saw the issue as a negotiating ploy. By saying, “We must not let our name disappear,” the McDac side felt certain that Boeing would yield more in return for agreement on no change in the company name.
“The Boeing side,” King continued, “wanted to have as little to do as possible with Stonecipher. He appeared to be on track to becoming the COO [chief operating officer] and president of the merged company, if the merger went through.”
Stonecipher did get the role he wanted; the boards approved the merger. “Condit asked me to put it together,” Jerry King continued. Although King had hoped to retire not long after this event, he agreed to stay on and spearhead a team of lawyers and engineers who would hammer out the agreement with their opposite numbers.
The process took eight months, and for King it was not an agreeable experience. “When we had a final wrap-up session in Colorado Springs,” he said, “the McDonnell Douglas people gave me a plaque that made me want to throw up. It was the cover of the [current] Economist. It showed two camels fornicating, and the cover line was ‘Who’s on Top?’ They gave it to me. I buried it in a closet and never showed it to anyone.”40
The reactions were mixed. Those who had favored the merger saw a $35-billion company become a $48-billion company, its parts mutually reinforcing—each, in theory, cushioning a downturn in the other’s market. Not the least of the gratified advocates were the financial markets, as reflected in the rise in share prices of the two companies. A few of the Wall Street analysts argued that the merger had saved Boeing, a company, they said, that had no cost controls and had forgotten how to run a business on cash.
Boeing Commercial’s people lost no time in deploring the event. It was, they thought, a disaster. The due diligence was described as having revealed a negative number for Douglas. It would cost more to shut down that business than get out of running it, as McDac would now be able to do. That much was clear. “Douglas was riding the back
end of its production cycle and, in effect, exiting the commercial business,” said one of its executives who was there at the time of the merger.41 In Seattle, a frivolous comment that stuck was “Let’s sell Douglas to Airbus for one French franc.”
Boeing had paid $13.3 billion for McDac. (“A smart guy,” said one disgruntled Boeing executive, “would have let it fold and then bought up the pieces at ten cents on the dollar.” Almost certainly, other parties, starting with the Pentagon, would not have let that happen.) For each share of McDac’s stock they held, its shareholders were awarded a 0.65 share of Boeing stock. However, most Boeing people discovered virtually overnight that the company’s two largest individual stockholders were now John McDonnell—no surprise there—and Harry Stonecipher, who also held numerous stock options.
The year of the merger, Boeing paid Stonecipher $3.5 million in cash, $4.1 million in restricted Boeing stock, and an additional $8.1 million in unrestricted Boeing shares. Included in the cash was $2.2 million to offset taxes on stock that would vest once the companies merged. Condit, by comparison, that year earned $1.3 million in cash and $204,000 in restricted stock.42
In a proxy statement issued in April 2002, at the time of an annual meeting of Boeing shareholders, John McDonnell was shown to hold just over 14 million shares. In second place was Stonecipher, with close to 2.5 million. The distant third was Condit, with about 816,000 shares.43
“So now Boeing had the two largest of its individual investors joined at the hip,” recalls Richard Aboulafia, one of the aircraft industry’s most highly respected analysts. “Both were now board members, and one was chief operating officer and president. This would make Michael Eisner blush. From a corporate governance point of view, it amounted to rank incompetence or something more sinister. In principle, there was no obstacle to the pair of them ripping the company apart for cash. In practice, that was unlikely, but the Stonecipher-McDonnell alliance could have affected Boeing’s plans for the future, and not to the advantage of the Boeing Commercial Airplanes company.”44
Not long after the merger, Larry Clarkson ran into T. Wilson, who said, “McDonnell Douglas has just bought Boeing with Boeing’s money.”45 Wilson may have said it to others as well; in any case, his comment became the affair’s epigraph. Wilson was privately appalled by the merger, telling various people that McDonnell Douglas brought nothing to Boeing. They had never won a head-to-head competition with Boeing, he would point out. Not since the early 1970s, he would add, had McDac itself designed the military aircraft that accounted for its success. “We got nothing out of that [the merger],” he told intimate friends. Wilson felt strongly that Boeing should confine itself to doing what it did best. “Boeing,” he often said, “should not be interested in acquisitions and mergers.”
“What badly troubled T. Wilson,” said Jerry King, “was the strength on the board that the McDac side ended up with. There was Harry and his attitude that he would whip the Boeing people into shape.” And, he continued, “Schrontz chose not to stay on the board. That took the heart out of it. His departure was the biggest mistake of all. Phil was left with no one to help him.”46 For King and other heritage Boeing people, Schrontz had been a source of strength and wisdom.
Many Boeing heritage people conceded that a shift in emphasis toward the military side would usefully balance the company’s dominant commercial business. And while acquiring the second-largest military contractor looked like a big step in that direction, Boeing, as they saw it, was already expanding its defense and space business. Not long before the merger, it had bought Rockwell International’s defense and space division for $3.2 billion and was on track to make other acquisitions.
The McDac people returned Boeing’s contempt for their military programs. Their line on Boeing’s focus on commercial aircraft was: Why bet on a high-risk, high-cost, low-margin business when you can depend instead on Uncle Sam?
Shortly after the merger, an experienced and currently serving Boeing engineer said, “Historically, McDonnell Douglas had a different culture. And that negative, predatory, autocratic culture has displaced Boeing’s old problem-solving culture.”47 He and others in Seattle, using similar language, talked about how their company had taken on the “crude, shoot-the-messenger style” of their new acquisition. Until the merger, Boeing still boasted that it was “a company of engineers.” But not after the merger. Its engineers became the company’s most disgruntled element.
Everyone assumed, correctly, that Phil Condit, who hated making decisions and hated controversy, would be no match for Harry, who liked nothing better than making decisions and didn’t mind controversy. Phil told at least one colleague that Harry Stonecipher would be there for no more than eighteen months.
AIRPLANE PROGRAMS are eyed with suspicion by stockholders. A new one will create a deficit. That is a certainty in a business that harbors few of them. The deficit may be erased—the sunk funds recaptured—as the factory floor comes down the learning curve and becomes capable of producing at manageable cost an airplane the market likes. Or the program stalls, and the company is stuck with another failed airplane program.
Although very different people, Condit and Stonecipher were aligned in their approach to company business. They had known each other since the mid-1970s, when Condit was the chief engineer on the 757 program and Stonecipher was selling GE engines. Shortly after taking the helm of this hard-nosed, dedicated airframe manufacturer, Condit spoke of taking it into “a value-based environment where unit cost, return on investment, shareholder return are the measures by which you’ll be judged.” He was intoning the Stonecipher creed.
As the second senior officer and a pivotal board member operating in tandem with John McDonnell, Stonecipher set about trying to change Boeing’s corporate culture by edging the company away from the risks of commercial airplane building and toward a focus on defense and becoming a global services corporation.
Condit and Stonecipher were about as different stylistically as two high flyers could be. Condit was patient and preferred being called Phil by the people, high and low, with whom he worked. He had a cultural side, affected, said various Boeing people. Stonecipher was blunt and impatient.
On March 25, 1998, about nine months after the merger, Stonecipher gave a rough, biting critique of the Boeing Company in a speech delivered at the Rotary Club in Seattle. What he said was bitterly resented, and still is—it’s still talked about within the company and the city.
In recalling what he called “the old Boeing,” Stonecipher described a conversation he’d had with the retired T. Wilson. “I told him Boeing is arrogant. He [Wilson] responded: ‘And rightly so.’ There’s a great difference between pride and arrogance,” Stonecipher told his audience of businesspeople.
Regarding company operations, he said, “I can stop a lot of spears for Condit, and I can throw a lot of spears.” He described himself as “profitability driven,” adding that for years he had defended himself against the widely viewed perception that he was interested only in making money. “After a while I just said, ‘You’re right. I am.’”
He compared the company’s financial status very unfavorably with that of GE and Coca-Cola. “We have returns that can’t even see the bottom of Coca-Cola. That is not acceptable.”48
Eight years later, reflecting on coming to Boeing, Stonecipher said, “Boeing people didn’t know the cost of anything. No one there shared cost data with anyone. No one knew the unit cost of anything they built. They needed help.”49 He had a point, if perhaps overstated. Various Boeing watchers on Wall Street felt roughly the same way about the company as it was operated then.
But Boeing heritage people worried aloud about what they saw: a potent figure—stronger by far than Condit, their nominal leader—but one who made no distinction between Coca-Cola, or soap, and Boeing’s bread-and-butter product. The jet airliner was not a commodity, they felt, but rather the nation’s most significant export because it earned the most dollars and harbored a singular array o
f advanced technologies. A strong national interest, they continued to think, lay in its good health and viability.
Condit strongly opposed allowing commercial aircraft to remain the company’s first-priority business. Some of the Boeing heritage people described his approach as “defend and extend,” meaning, defend your legacy by protecting existing products like the 737, and slow down the other guy by pretending to embark on new airplane programs. Condit did invite controversy by turfing out numerous executive-level people and cutting employment. And he started talking about taking the company to Chicago. More important, Boeing was losing market share.
But the apparent upside received greater attention. Profits were rising, and costs starting to drop. Lean manufacturing had begun belatedly to take hold, although it was still costing Boeing more than it should have to build airplanes. For a time Condit was lionized in the business press.
Stonecipher, too, was considered good value, notably on Wall Street and in the boardrooms of companies that he had managed. His quarterly reports had normally shown a profit, and under his direction corporate shares had a tendency to rise. However, many, if not most, people in his trade who thought that staying competitive meant investing in R&D and financing new products worried about his unblinking focus on the bottom line.
Wherever he fetched up, Stonecipher was judged smart, capable, prodigious, and opinionated. He could try to cut back the erratic commercial aircraft trade. But he didn’t sidetrack what since the mid-1960s had been the Boeing Company’s core business.
Boeing Versus Airbus Page 16