Defense Merger Mania

THE DAILY FED

Defense Merger Mania

Congressional leaders with jurisdiction over antitrust and transportation issues have been mum on the issue since Sunday's announcement. But experts have speculated the deal faces few roadblocks.

The $13 billion acquisition of McDonnell Douglas Corp., the leading manufacturer of military aircraft, by Boeing Co., the leading builder of commercial aircraft, must be reviewed by the administration. "I don't think there's going to be any real problem, particularly from the defense point of view," defense expert Lawrence Korb of the Brookings Institution said today. "I imagine it will go pretty quickly." Korb also anticipated the plan will go through the Federal Trade Commission, which shares concurrent jurisdiction with the Justice Department's Antitrust Division.

House Minority Leader Gephardt, whose St. Louis district is home to McDonnell Douglas, hailed the merger announcement as good news not only for his constituents but for the U.S. in the global aerospace industry. "With continuing domestic budgetary pressures, the merged corporation should be a pre-eminent military contractor. In the commercial arena, the strength of the merged corporation should help to ensure the U.S. can compete effectively and provide jobs and opportunity to workers in St. Louis and across the country," Gephardt said.

The recent round of defense industry mergers and acquisitions will likely bring major changes in the annual Government Executive rankings of the Top 200 Federal Contractors. Until now, McDonnell Douglas had refused to play the mergers game. As Lockheed and Martin Marietta merged and then acquired Loral, which itself had acquired divisions of Unisys, IBM, LTV, Ford and Goodyear, McDonnell Douglas stayed on the sidelines.

Boeing moved quickly last week to close its acquisition of McDonnell Douglas after four days of talks because McDonnell Douglas could have made a merger impossible by acquiring Hughes Electronics' defense units, which General Motors is offering for up to $9 billion. Raytheon Co. is now the leading candidate to buy the Hughes defense business.

Meanwhile, Northrup Grumman Corp. is the likely buyer in Texas Instruments sale of its defense division for around $2.5 billion.

While Lockheed Martin, strengthened by its acquisition of No. 9 Loral, will maintain its several billion dollar lead over its nearest competitor in the Top 200 rankings, the McDonnell Douglas (No. 2) and Boeing (No. 4) merger will close the gap. If Raytheon (No. 7) acquires Hughes' defense components, it could become the third largest government contractor, over Westinghouse, and push General Motors (No. 6) off the chart.