Wayne State University
Department of Economics
Industrial Organization II – ECO 7210
Winter 2006

“The Merger of Boeing and McDonnell Douglas”

Submitted by:

Tim Bachinger

TABLE OF CONTENTS

TABLE OF CONTENTS ... II

1. Introduction ... 1

2. The Relevant Merger Legislation and Procedure ... 1

3. Merger Analysis  ... 2
3.1. The Merging Companies and the Operation ... 2
3.2. The Relevant Market ... 4
3.3. The Market prior to the Merger  ... 5
3.4. Assessment of the Post Merger Market Structure ... 7
3.4.1. Impact of McDonnell Douglas’s Commercial Aircraft Business ... 8
3.4.2. Overall Effects Resulting from Defense and Space Business ... 9
3.5. The European Commission’s decision ... 11

4. FTC’s Analysis and Decision ... 12

5. Conclusion  ... 14

APPENDIX ... 15

REFERENCES ... 16

1. Introduction

In 1997, the merger of The Boeing Company and the McDonnell Douglas Corporation that both affect the European market and the US market for aircraft manufacturing were notified to the European Commission (EC) and the United States Federal Trade Commission (FTC). Only few mergers in recent years have attracted so much attention on both sides of the continents, showing how antitrust laws have become international.¹ The merger created the world’s largest aerospace company and second largest defense supplier in the world. Furthermore, the merger meant that the two last remaining commercial aircraft manufacturer were combined in the United States. The merger created a company with high market shares in both the European and the US market which already before the mergers showed high degrees of concentration. Accordingly, the EC investigated if the merger created or strengthen a dominant position, referring to EU merger laws. Although the FTC cleared the deal in 1997, the European Commission threatened to oppose it, warning the Europeans against “an unwarranted and unprecedented interference in a U.S. business transaction”.² This paper analyses the impact on competition of the Boeing/McDonnell Douglas merger with respect to the market for commercial aircraft manufacturing along the EU merger guidelines and presents the reasoning and the decisions of the EC. It proceeds as follows: First, a brief overview of the relevant EU merger legislation and guidelines will be given. Section 3 comprises the merger analysis with the EC’s decision. Section 4 concludes with a broader classification of the case, concerning the contradictions among the FTC and EC decisions.

2. The Relevant Merger Legislation and Procedure

To ensure a uniform and effective application of EC competition law, referring to the enlargement of the European Union, the EU has adopted the new EU merger legislation ‘Council Regulation (EC) No 139/2004’ since May 1, 2004.³ However, since the Boeing/McDonnell Douglas merger was notified in 1997, the relevant sections of the old merger legislation ‘Council Regulation (EC) 4064/89’ from 1989 will be briefly described here.⁴ The relevant sections of Council Regulation (EC) 4064/89 for this case are the following:

• According to Article 6(1) (c), the EC can initiate investigations if they find that the notified concentration falls within the scope of the Merger Regulation and can raise serious doubts as to its compatibility with the common market. 
• According to Article 8(2), if there are modifications by the parties such that the facts of Article 2(3) are not fulfilled, a concentration is compatible with the common market.

The EC questioned whether the combination of Boeing and McDonnell Douglas would create a dominant position in any of the relevant markets affected by the transaction. The primary steps in EC review can be summarized as follows:

• 12/14/1996: Merger agreement between Boeing and McDonnell Douglas signed.
• 12/16/1996: Initial courtesy contact made with EC Merger Task Force.
• 2/18/1997: Merger review Form CO filed with EC.
• 3/19/1997: Commission decision to conduct in depth investigation of proposed merger issued.
• 6/12/1997-6/13.1997: EC hearings on merger held.
• 7/30/1997: Commission decision issued clearing merger based upon negotiated

“undertakings”; commitments by Boeing

[....]

1 Boeder/Dorman (The Economics, Antitrust Law and Politics of the Aerospace Industry), p. 1.

2 USIA (Case Study: The Boeing-McDonnell Merger).

3 European Commission (Council Regulation (EC) No 139/2004).

4 European Commission (Council Regulation (EC) No 4064/89).