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McDonnell looks ahead
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November 18, 1996: 7:25 a.m. ET
Company says it will survive, despite losing massive Pentagon contract
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NEW YORK (CNNfn) - McDonnell Douglas Corp. executives scrambled to accentuate the positive over the weekend after the company was eliminated from a massive U.S. military jet fighter contract by the Pentagon.
"In terms of financial exposure, in the next five years, it's a pretty small program," Harry Stonecipher, McDonnell's president and chief executive officer, told reporters. "But certainly in terms of the overall future, 10 years and beyond, it is a significant program to us."
On Saturday, U.S. Defense Secretary William Perry announced that Boeing Co. and Lockheed Martin Corp. will compete in the final leg of competition for a contract to design and build the "Joint Strike Fighter," a radar-evading aircraft that can be used by all branches of the military. The final contract for 3,000 planes, which will be awarded in 2001, is believed to between worth $170 billion and $219 billion.
Of the rival companies, financial analysts said that McDonnell had the most to gain and lose from the Pentagon's decision. The St. Louis-based company is undergoing considerable changes in its strategic outlook and has wanted to focus more intensely on the defense arena. Just two weeks ago, it canceled plans to build a long-range commercial jet.
Losing the contract could cut into McDonnell's stock price as investors lose confidence. Company executives had billed the "Joint Strike Fighter" as a "defining moment, in terms of business opportunity" for the defense industry.
Stonecipher told The Wall Street Journal he was not pleased with the outcome of the heated race to build to new fighter. But he added that it has given McDonnell a clearer picture of what it needs to do to remain a factor in the post-Cold War defense industry.
McDonnell is likely to seek some form of alliance or merger with a number of smaller defense contractors, Stonecipher told the Journal. Among the likely takeover targets, industry observers speculate the company could acquire the defense unit of Texas Instruments Inc.
Another option is that McDonnell could work with Boeing on the jet-fighter project, a move Boeing might pursue as it attempts to win the final contract. The two sides have held exploratory merger talks in the past.
McDonnell, with 64,000 employees, remains one of the largest military-plane contractors. It currently has a backlog of $45 billion in orders for planes, rockets, missiles and other products. What remains uncertain, however, is what will happen after those orders are filled.
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