FTC Approves Boeing Merger -- Mcdonnell Deal's Next Stop Is Europe

WASHINGTON - With federal approval today of Boeing's acquisition of McDonnell Douglas, the Seattle aerospace company takes a giant step toward becoming the undisputed titan of the skies.

In a divided decision, the Federal Trade Commission approved Boeing's purchase of St. Louis-based McDonnell Douglas for $13.3 billion, creating an aerospace behemoth nearly twice the size of its nearest competitor.

The next step for Boeing might be the most difficult: winning approval from European antitrust authorities, whose stricter guidelines permit them to take into consideration the impact on Boeing's archrival, Airbus Industrie.

A European antitrust task force finishes its work on Friday and authorities are expected to announce their decision by the end of the month. The European Commission has claimed the right to review the U.S. merger because of its impact on the European marketplace. Under a 1991 U.S.-European agreement, the United States has recognized that right.

Assuming problems with the Europeans are resolved and shareholders of both companies approve the merger as expected July 25, the merged defense and commercial-aircraft company - the largest in the world - could begin operation on Aug. 4.

FTC approval of the merger came down to four its five members deciding that the deal would not result in any substantial lessening of competition for either defense and space aircraft or commercial jetliners. Facing their critics head on, four commissioners acknowledged that the proposed merger appears to raise serious antitrust concerns.

With implicit backing from the Pentagon on the merger of the defense parts of the companies, the remaining question was whether McDonnell's jetliner division, Douglas Aircraft, was realistic competition.

"Billions and billions of dollars would have been required to turn this firm around," said William Baer, director of the FTC's bureau of competition. "No prudent board of directors would approve a massive cash infusion into the company unless there was some indication that it would pay back to the shareholders."

The FTC not only decided that McDonnell Douglas "no longer constitutes a meaningful competitive force in commercial-aircraft markets," but also decided that "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."

Douglas Aircraft's market share dwindled to 3 percent last year.

The only dissenting view on the commission came from Mary Azcuenaga, who said the commission should have continued to question the merger of the commercial-aviation parts of McDonnell Douglas before making a ruling.

"Douglas may need more customers for its products," Azcuenaga said. "But having won fewer customers than it might does not make Douglas unable to compete for future sales."

During the six-month review, FTC staff members interviewed 40 executives of airlines to find out if they thought that the merger would cause higher prices from Boeing.

While some airlines preferred that Douglas remain in the bidding, they were virtually unanimous in acknowledging that they were unlikely to buy from Douglas because it appeared not to be making investments necessary to remain viable, according to an attorney who worked for McDonnell Douglas.

Not leaving anything to chance overseas, Boeing has been waging a public-relations war, coupled with a legal battle behind the closed doors of the European Commission's antitrust task force.

Some antitrust lawyers said the FTC decision will bolster the pressure in Europe, though different criteria can be used for approving mergers.

The commission's five-page statement answered critiques, some of which came from Europe, and rejected the notion that the merger was approved because the United States needs a "national champion" in aircraft production to compete in the global market.

"We do not have the discretion to authorize anti-competitive but `good' mergers because they may be thought to advance the United States' trade interests," the commission said in a statement released by Chairman Robert Pitofsky, and commissioners Janet Steiger, Roscoe Starek and Christine Varney. "If that were thought to be a wise approach, only Congress could implement it."

The commissioners called the "national champion" argument a delusion.

"The best way to boost U.S. exports, address concerns about the balance of trade and create jobs is to require U.S. firms to compete vigorously at home and abroad," they wrote.

"We are deeply gratified that the Federal Trade Commission has given unconditional approval to the Boeing/McDonnell Douglas merger after such a thorough review," Phil Condit, Boeing chairman and chief executive officer, said today.

Boeing, for its part, has signaled that it might be willing to rewrite its deals to be the exclusive jetliner manufacturer for three major U.S. airlines by allowing Airbus a shot at some business.

Beyond regulatory hoops, there are still other details of the merger to be worked out. The two companies must settle on a combination of different cultures and approaches under the direction of Phil Condit, who asks employees to address him by his first name.

McDonnell Douglas' Chief Executive Officer Harry Stonecipher, known for a stern demeanor, is set to move to Seattle to become the new company's chief operating officer overseeing daily operations of the combined companies and managing top senior executives.

Boeing and McDonnell Douglas officials said they didn't anticipate that the merger would result in any layoffs in the short term because business is booming. But they said the new company could take unspecified steps to increase its efficiency - such as reassignments and possible transfers of workers between the Puget Sound area and Southern California.

With last year's acquisition of Rockwell's aerospace and defense divisions, Boeing now would have extensive operations in Southern California, where McDonnell Douglas has plants. Boeing would continue to run those plants for now.

A generation ago, the merger would have been difficult to get past antitrust regulators. But court rulings and government posture have softened the rules.

Pitofsky, author of articles on the vigorous use of antitrust laws, now urges a careful, laser-like approach to merger enforcement.

The FTC has a powerful example after a judge yesterday backed up the commission's ruling that an office-supply superstore merger would cause prices to increase.

But the commission demurred on the Boeing merger - though attorneys for consumer activist Ralph Nader were so convinced FTC lawyers were looking for a way to halt the merger that they predicted the deal would be blocked.

They were wrong; the FTC decided it couldn't muster evidence that the merger would cause an anti-competitive scenario.