By Chris Hughes / Bloomberg Opinion
There are many reasons Boeing Co. has fallen into such disrepair that it needs to sell shares for a potential $19 billion cash injection, and just as many lessons to draw. But one factor arguably underpins them all, and shareholders should be taking a long look in the mirror.
Boeing announced Monday its plans for the share sale, which it needs to help slash nearly $50 billion of net debt, protect its investment-grade credit rating and, ultimately, lay the financial foundations to build a new plane. The origins of this dire situation go back decades, long predating the fatal crashes of 2018 and 2019 involving the 737 Max. They also extend beyond Boeing’s protected status as one half of a critical duopoly, too big to be taken over and too important to be fully restrained by market and regulatory forces.
The history is well chronicled but worth recapping. Analysts and academics point to Boeing’s 1997 acquisition of McDonnell Douglas as a turning point. The defense contractor was struggling with the post-Cold War decline in military spending and its own failure to innovate. Rather than the buyer’s culture dominating the combination, the opposite seems to have happened. The deal was, argues Agency Partners analyst Nick Cunningham, a de facto reverse takeover of Boeing.
The strategy and execution in the subsequent years arguably sowed the seeds of this week’s cash call. Boeing suffered mighty cost overruns in developing the 787. Wary of the snags with such big engineering projects, Cunningham suggests, the company dithered over developing a successor to the workhorse 737. When European rival Airbus SE stormed the market with a successful revamp of its A320, Boeing responded with what turned out to be an unsafe revamp of the 737 to create the Max; with tragic results.
Meanwhile, financial engineering took center stage. Boeing engaged in a rolling share buyback program that ended up distributing around $40 billion to investors. Between 2013 and 2018, the company would go from having net cash of $6 billion to $5 billion of net debt. It had no financial cushion to deal with the operational and financial aftermath of the Max crisis, which worsened when a door plug blew out of an Alaska Airlines 737 Max-9 during a flight in January.
The situation has been exacerbated by a strike that’s crippled production in the Seattle area. Despite promises by new Chief Executive Officer Kelly Ortberg to reset relations with the workforce, the labor dispute is stalling any turnaround plan.
Clearly, most other companies that produced such a long list of failings in strategy and execution would have been taken over by now. But because Boeing is one huge half of a duopoly, antitrust and size precluded that standard fix-it mechanism. Boeing is, of course, smaller than it was. And in theory, an argument could be made that a consortium of financial and industry buyers should coalesce to break it up. Notwithstanding the sheer scale of such an operation — Boeing’s enterprise value is still more than $140 billion — the fresh obstacle is the unattractiveness of Boeing as a target.
Yes, the company has an alluring civil aviation order backlog that represents potential future cash flow. However, it needs a huge amount of investment. And its defense business is locked into loss-making contracts it can’t wriggle out of. Even if you could buy it, why would you?
The contrast with Airbus is painfully instructive. With similar protected status, Airbus has also made serious mistakes. Indeed, Airbus has always enjoyed even greater practical and theoretical immunity to takeover than Boeing because France, Germany and Spain sit on a collective blocking stake. When management proposed a friendly merger with the UK’s BAE Systems Plc in 2012, Germany is said to have nixed it. Airbus’ history includes a bribery scandal and the costly white elephant of the A380 superjumbo; a misguided attempt to outdo Boeing’s iconic 747.
And yet Airbus is now thriving with an order backlog that dwarfs Boeing’s. The glaring differences in strategy and management are obvious. Airbus favored aeronautical engineering over financial engineering. And with German heritage, it has fostered a much more balanced and constructive relationship with its workforce. By contrast, post-pandemic labor shortages have hit Boeing disproportionately.
The financial crisis exposed how size and protection from failure encouraged banks to take reckless risks. But it would be wrong to think that Boeing lacked any governance checks. The simple question is: Where were the shareholders? Where was the activist daring to argue against gearing up the company as the aerospace cycle matured?
Their silence must sit chief among the other more visible reasons for Boeing’s demise. They colluded in the strategy; they could have changed it.
When it comes to shareholder pressure, Boeing doesn’t look to be any more protected than most other U.S. companies. The board isn’t staggered; it comes up for reelection each year. Directors can be fired without cause.
“When looking at Airbus and Boeing, the failing one was the one more exposed to a theoretical takeover or activism threat, given the ownership structure,” said Edmund Schuster, professor of corporate law at the London School of Economics. “Boeing’s governance arrangements mean that its board is actually quite exposed to pressure from activists.”
Why, then, didn’t shareholders act? Doubtless it’s because Boeing was throwing cash at them through those share buybacks, and the share price was responding. But this was just classic short-termism. As Cunningham says: “There was no reason for investors to examine the gift horse’s dentistry.”
Even as recently as this year, shareholders’ passivity was such that it was Boeing’s airline customers who moved for Boeing to replace its CEO.
The gift horse’s tooth decay is now all too apparent. If this amounts to a failure of stock market governance, the bill is landing in the right place. The stock market took the money out of Boeing. Now it’s time to put some back.
Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper. More stories like this are available on bloomberg.com/opinion. ©2024 Bloomberg L.P.
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