On December 1996, the Boeing Company purchased McDonnell Douglas for a premium of 21% over the price of its stock. This move gave Boeing the opportunity to increase its value by transferring its knowledge across business units, both commercial and defense aircraft. But in the two years after the merger, Boeings stock lost one third of its value due to increased inefficiencies and costs associated with the merger. Would this merger really add value to Boeing or would the costs outweigh the benefits gained.The Aerospace IndustryCommercial AircraftThe commercial aircraft industry had experienced a significant change during the deregulation of domestic airlines in 1978. The deregulation resulted in an increase in air travel, intense airfare competition among carriers, the entry of low-cost and low-capacity airlines. This increased competition shifted the focus of aircraft manufacturing from performance to low cost and from service to price. Other significant characteristics of the commercial aircraft industry are:High barriers to entry: These were due to the very high and increasing costs of product development, the need to establish long learning curves and achieve economies of scale, no guarantee that the company would ever break even. This meant that a company had to wait for at least a decade to reach break-even point, and hope that the technology would not be obsolete by that time. Economic failure was the norm instead of the exception in the aircraft industry.Deep cyclical movements between booms and bustsSubcontracting: Grown in importance as aircraft components became more and more complex. This was seen as way of sharing the risk associated with a project, where the most efficient subcontractors would win bids to provide part of the assembly to a larger contractor.Risk taking is rewarded: Although very large investments had to be made to develop unproven technologies, these were rewarded by capturing market share quickly...
