$4.2 Million Merger Collapses
The Boeing Embraer Deal
The $4.2 billion Boeing Embraer deal was years in the making. Embraer was to sell 80% of its aviation unit to Boeing and become ‘’Boeing Brasil – Commercial’.
The benefits for Boeing were to widen up new manufacturing opportunities and lower-cost engineering resources. They were using the deal to compete against rivals, Airbus in the regional jet sector.
Embraer was looking to ramp up their E2 regional jet production using the marketing power of the industry leader. The money from the deal was said to go on a $1.6 billion dividend payout to shareholders as well as debt payments.
The ever-increasing domination of Boeing and Airbus has weakened smaller plane manufacturers’ chances of competing in the industry.
The coronavirus pandemic has caused the aerospace industry to collapse and demand for production of new planes has been cut. Boeing was under pressure to raise the cash and looked reluctant to pay the agreed $4.2 billion on a ‘product’ that had since lost market value.
The American multinational company with corporate headquarters in Chicago, Illinois, has been losing money since its biggest selling planes, the 737 Max, was grounded a year ago. The 737 Max brings in 40% of Boeing’s income but is costing the company billions. Last October they reported a loss of $9 billion.
The 737 Max was grounded after two crashes, killing a total of 346 people, was blamed on design faults.
The Brazilian aerospace conglomerate based in São Paulo produces commercial, military, executive, and agricultural aircraft. They are the third-largest civil plane producers after Airbus and Boeing.
What Went Wrong With the Boeing Embraer Deal
Reuters reports “Embraer hits out after Boeing scraps $4.2 billion tie-up”
The collapse was first reported by Reuters and was announced just hours after a midnight deadline expired with no deal agreement. Boeing refused to extend the deadline which caused an angry response from Embraer.
Boeing accused Embraer of not meeting conditions for closing the business deal, but Embraer said Boeing had scuppered it because of broader financial troubles it faces because of the coronavirus pandemic crisis and the grounding of its 737 MAX.
Boeing senior vice-president Marc Allen announced “Over the past several months, we had productive but ultimately unsuccessful negotiations … We all aimed to resolve those by the initial termination date, but it didn’t happen”.
Brazil’s Embraer SA since announced it had begun an arbitration process against Boeing Co, for suddenly canceling the agreement and would pursue “all remedies”. They look to sue Boeing for more than the $100 million breakup payment because of impeded sales of its E2 jets.
The Brazilian government is now eyeing up China as a potential new business partner. Hamilton Mourao, Brazil’s Vice President, has called the situation a “blessing in disguise.” He said, “this shows once again that a marriage (with China) needs to continue because it is an inevitable marriage.”
Boeing is seeking U.S. federal aid for the aerospace sector, and now looks to reduce their workforce.
They reported losses of $641 million for the first quarter and announced it will be cutting back airplane production.
Boeing will decrease the size of its overall workforce by 10%, getting rid of around 16,000 jobs as the company adapts to nearly non-existent demand for air travel in the wake of the coronavirus pandemic.
“This virus is a body blow to the aviation industry,” Boeing CEO David Calhoun said during a conference call with journalists Wednesday, in which he outlined the severe impact the coronavirus has had on air travel.
Investors hoped the buyout would continue despite concerns, but Boeing shares fell to an eight-year low.
Embraer tried to assure investors that it continues to be a solid company despite the setback and was able to make $1 billion in savings for 2020. They currently have no order cancellations as a result of the coronavirus pandemic crisis.
Whilst airline stocks have lost half their value this year, they are starting to bounce back as news of coronavirus restrictions being lifted is reported.
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