Boeing-McDonnell Douglas Merger Approved: Defense Contractor Consolidation Creates Oligopoly

The Federal Trade Commission approved Boeing’s $13.3 billion acquisition of McDonnell Douglas, completing a merger wave that reduced major U.S. defense contractors from 51 firms in the late 1980s to just five dominant primes by the late 1990s. The consolidation wave was actively encouraged by the Pentagon’s 1993 “Last Supper” dinner where Defense Secretary Les Aspin and Deputy William Perry urged defense executives to merge rapidly in response to declining post-Cold War budgets.

The Boeing-McDonnell Douglas merger eliminated one of only three major suppliers of commercial aircraft (reducing to Boeing and Airbus duopoly) and consolidated defense contracting across multiple critical sectors including tactical fighters, missiles, military transport aircraft, and space systems. The FTC approved the deal without requiring significant divestitures, accepting Boeing’s arguments about efficiencies and international competition despite clear increases in domestic market concentration.

The merger was part of an unprecedented defense industry consolidation wave during the 1990s:

• 1994: Northrop acquired Grumman
• 1995: Lockheed merged with Martin Marietta, creating $23 billion combined entity
• 1996: Boeing acquired Rockwell’s defense and space business
• 1997: Boeing acquired McDonnell Douglas for $13.3 billion
• Later: Raytheon, Northrop Grumman, General Dynamics acquired numerous smaller firms

By 1996, The Wall Street Journal reported that “with the Pentagon acting as cheerleader and federal antitrust regulators largely falling in line, the number of major players in the aerospace and defense field has shrunk by more than half since the collapse of the Soviet bloc, to just six major companies.” The FTC didn’t block any of these mergers, believing consolidation was a cost-saving measure for the federal government.

The Pentagon’s active encouragement of consolidation through the 1993 “Last Supper” represented extraordinary government intervention to promote rather than prevent monopoly formation. Defense Secretary Les Aspin and Deputy Secretary William Perry invited the chiefs of the nation’s biggest defense contractors to a dinner and bluntly told them that defense spending was going to fall much farther and faster than current trends, and they needed to consolidate or face bankruptcy. The dinner effectively gave official permission—even a mandate—for merger mania.

The consolidation dramatically reduced competition for major weapons systems. Over approximately three decades, the number of suppliers in major weapons categories declined substantially: tactical missile suppliers declined from 13 to 3, fixed-wing aircraft suppliers declined from 8 to 3, rotary-wing aircraft suppliers declined from 4 to 3, and satellite suppliers declined from 8 to 4. This concentration gave surviving contractors enormous pricing power in negotiations with the Pentagon.

By 2023, five contractors—Lockheed Martin, Northrop Grumman, Boeing, General Dynamics, and RTX (Raytheon Technologies)—were prime contractors on over 74% of major defense acquisition programs. These companies face minimal competition in many weapon categories, allowing them to extract high prices and favorable contract terms from the Department of Defense.

Academic research found that higher product market concentration induced by 1990s consolidation caused defense procurement to become less competitive and more reliant on cost-plus contracts (where contractors are paid for all costs plus a profit margin, creating incentives to inflate expenses). The consolidation correlated with cost overruns, schedule delays, and reduced innovation in weapons development.

The defense consolidation wave illustrated regulatory capture and the abandonment of antitrust principles when politically powerful interests aligned. Defense contractors, Pentagon officials, and key members of Congress all supported consolidation, creating a political coalition that overwhelmed antitrust concerns. The FTC yielded to this political pressure, approving mergers that clearly reduced competition based on arguments about efficiency and cost savings that were never rigorously verified.

The human cost was also severe: between 1987 and 1996, as the industry restructured, approximately 1.4 million jobs were lost in defense-related private sector employment, devastating communities dependent on defense manufacturing.