Boeing-McDonnell Douglas Merger - Essay Example

Summary The article is in reference to the mergers and takeovers that the United s aviation industry has undergone. The article is actually a transcript of the minutes of a discussion program hosted by Elizabeth Farnsworth and the guests for this discussion include Lawrence Korb who is a former assistant secretary of defense, and Pierre Chao who is a renowned defense analyst. The agenda of the discussion is to determine whether the acquisitions and merger processes that have taken place in the aviation industry of United States is beneficial or a potential disaster for the overall economy and progress of this industry.

The evaluation of this is considered under the economic, development, strategic and political factors. The main discussion is whether the mergers and takeovers have benefitted financially and economically. To this question, both the guests agreed that in the short run at least, the greater financial pool available to these companies is now required to undertake large research operations and improve new technologies. Also, that the environment in the aviation industry may help to trigger savings for all which will eventually help the taxpayers or the general public.

It also is about the efficiency of the companies that is if they have been able to increase their efficiency through this process and whether they have passed this efficiency to the buyers. To this, the guests disagree with each other and they are of the opposing views. There were discussions on further factors but the most important was about the economic aspect of this mergers process. The process is very important for the United States as it involves huge risks and a lot of money of these major corporations as well as the taxpayers’ money.

Critical Analysis The article is actually the minutes of a discussion program and the topic under discussion was regarding the major acquisitions and mergers that have taken place in the aviation industry in the United States. It must also be noted that these aviation companies used to be national defense contractors and had been in agreements with the Pentagon or precisely the Defense Department of the United States. The discussion considered several factors that needed to be taken into regard and these factors were very much successfully discussed which included discussions on economic, strategic and political grounds.

The first discussion held was regarding the economic and financial aspects that have been influenced majorly be these mergers. This discussion is particularly important given that one of the major budget allocations of the United States budget is for the defense of the country. This involves huge amounts of money and influences the general public as well due to the fact that the entire defense budget is actually the taxpayers’ money. The major economic aspect of this mergers and acquisitions process is about the efficiency and the costs of the aviation industry now that the number of players in the industry has reduced drastically.

The guests who include respected people from the defense background agree to the premise that the mergers will drive up the efficiency of the industry at least in the short run but this may not be the case in long term. The analysts in this discussion have actually failed to answer this question economically and their thought process regarding this topic is to a certain degree limited. The number of suppliers in the aviation industry has reduced which means that the supply of the airplanes will reduce sooner or later.

This concept is shown in the diagram on the right which is Figure 1. Due to this acquisition and merger process, the supply will reduce sooner or later. In the long run, the supply curve of the industry will shift to the left and with an unchanged demand; this will drive the prices upwards and this will be passed onto the buyer which is the defense department of the United States. The supposed efficiency achieved by the industry currently is only for a limited period of time. In the long run however, the prices will be increased since the defense department does not have many options available.

Previously, the US defense department could give a threat to the companies that if they charge higher prices, then they have the option available to buy instead from their competitor which also used to be an American corporation. However the situation has changed in recent times since all these companies have combined with each other and the defense department can no longer give a threat to these suppliers. The current market situation is no longer competitive and has taken the form of an oligopoly thanks to these mergers and acquisitions.

An oligopoly is an economic state when there are only a few major players in the market and they have the power to influence the quantity as well as that they are the price makers rather than price takers. This means that since the aviation industry in the United States is an oligopoly, these companies are now the price makers and they can influence the prices that the Pentagon will be forced to buy at. They are aware that the Pentagon will not prefer buying from a foreign supplier since it may transfer the information from the US to the foreign nations, and therefore they have to buy from the local companies only.

This factor is very important for the local players since they can dictate the prices now. This gives rise to another major discussion that is the political influence of these suppliers over the defense department. The fact is that the Pentagon or the defense department of the United States is dependent on the local aviation companies and these companies are aware of this fact. This means that these companies can demand the terms of agreement with the several government departments, not just financially but also other aspects.

Once these companies are influential enough over the government, they can demand certain policies which may be beneficial for the companies but at the expense of the general public or government objectives. Previously, the government had a lot of options to choose from so any single company could not dictate the terms to the government but the same situation does not exists now that there are only a few players to deal with. On the other hand, the reduction of the suppliers in the nation through mergers and acquisitions has helped the nation too to a certain degree.

Now that the companies are combined with each other, they have also merged their financial pools available with much greater amounts of money. The aviation industry is of such a nature that one has to invest in the technological improvement constantly to introduce new measures of efficiency and performance. The research and innovation in the aviation industry involves huge costs that may define the companies’ future as a breakthrough may send the company to the heights of success. On the other hand, a failed investment in research and development may leave the company as bankrupt.

With these high risks involved, it is necessary for the firms to have excess reserves available so that they are capable of undertaking such development projects. A smaller firm will lower amounts of development budget available may face financial constraints during the development process as well as end up bankrupt in case of a failed development project. However, this will not be the case in a larger firm who has funds available to survive a setback if any development project goes wrong. Therefore, the analysts in this discussion program have successfully managed to highlight this implication.

However, the guests have been unable to justify their stance on why the general public should be informed and concerned with the discussion under taken. The major buyer of these aviation corporations is the defense department of the United States which is actually mostly funded by the general public who pay the taxes. These people have every right to be informed about how their money is spent and they have the right to know whether the effects of this change in such a major industry in the US is working for the benefit or for the worse of the nation.

In conclusion, I think that the analysts have discussed the major aspects of these actions convincingly. They have considered the political, economic and strategic implications that will be influenced by the actions of the government and the aviation companies. However, they have failed to take the discussion in depths specially given that they were unable to discuss the economic aspects completely and also that they underestimated the political influence of the aviation companies on the government of United States.

Works Cited Nikkis. Block One Diagrams. .