Boeing & McDonnell Douglas Merger & Acquisition By 04 April Merger & Acquisition Analysis The ever growing world of business uses different restructuring techniques in order to improve their market share and beat competition. The ways to acquire or become part of an organization are mergers, acquisition and sometimes hostile takeovers. “The purchase of one corporation by another is called merger. An acquisition is essentially the same thing as a merger, but the term usually is used in reference to a large corporation’s purchase of other corporations. Although all mergers and acquisitions are friendly, hostile takeovers also occur. A hostile takeover is a situation in which the management and board of directors of a firm targeted for acquisition disapprove of the merger.” (Pride, Hughes, & Jack, 2010) This assignment is an analysis on the merger of the two aviation giants, Boeing and McDonnell Douglas. This merger was said to be one of the largest in its kind and the tenth largest in the United States of America. The Boeing Company was founded in 1916 in the US and with time it became the number one company in the aviation business. The Boeing’s business encompasses 20% defence deals and 80% commercial ones. The McDonnell Douglas Company which is a merger between McDonnell Aircraft Corporation and Douglas Aircraft Company came into being in 1967. The customer base for this company is around 72% defence and the rest commercial. The Boeing & McDonnell Douglas merger took place in July 1997.
This was a horizontal merger with the company keeping its name as The Boeing Company. During that time the defence spending was shrinking and the commercial market was booming. This situation was favourable for Boeing Company’s but the main concern for this firm was the cyclical ups and downs making the aerospace industry more and more unpredictable. The McDonnell Douglas majorly dealt in the defence sector was concerned by the decreasing defence spending, leading to a decrease in share. The two companies decided to merge in order to achieve synergy and increase efficiency. The valuation criteria used for deciding the merger was discounted cash flow (DCF) analysis. The DCF method is an important tool for evaluating mergers and acquisitions. The cash flows of McDonnell Douglas was very appealing to the Boeing Company, as McDonnell Douglas showed good earnings in the third quarter of 1996, when the analysis of weather to acquire McDonnell Douglas was being evaluated. The discounted cash flow method is more reliable than the relative other valuation techniques due to the accurate and independent result. The relative methods like the price to earnings ratio etc can give misleading results at the time of undervalue or overvalued market. However the discounted cash flow method takes unto account the future cash flows of the firm and comes up with the accurate net present value of the firm. It is accurate because it is not a guess work or a trial and error situation. This method is known for its simplicity, accuracy and independent value. However, this method does have its shortcomings as well. This method is only as accurate as its input value. The assumption of future cash flow, discount rate, growth rate of the company, frequency of dividends etc. can all pose threat to the value obtained from this method. Thus, this merger was the largest one in the history of aerospace merger and a very successful one. The betas after this huge restructuring were calculated which showed optimized results in terms of decreasing risk and increasing profitability. Reference: Pride, William M., Hughes, Robert J., & Jack, R. Kapoor. (2010). Business. Mason: South Western Cengage Learning.