The 1997 Boeing-McDonnell-Douglas merger was really the work of outgoing Boeing CEO Frank Shrontz. It was a $12 billion stock swap for essentially the defense business, because McDonnell’s commercial airplane business was worthless by that point. Really it was worse than worthless, 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McDonnell-Douglas fleet, which became a big headache when Alaska Airlines MD-80 crashed three years later — due to an outdated rudder design that dated from the 1960s.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.
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 own managers and essentially let them run Boeing. That’s why it was said that McDonnell-Douglas essentially 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 plane that eventually reasserted Boeing’s technological leadership in this industry.
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 delivered 2 1/2 years late after several billion dollars of cost overruns, largely 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.
