Boeing Bid for Embraer Could Backfire

(Bloomberg Gadfly) -- Boeing Co.'s latest salvo in the escalating battle with its planemaking rivals could wind up piercing its own foot. 

The $175 billion company, it was revealed Thursday, is in talks to acquire Brazilian regional-jet maker Embraer SA. The deal would give Boeing products that compete with the Bombardier Inc. C-Series planes in which its rival Airbus SE just agreed to acquire a stake. Airbus made that deal after the future of the project was cast in doubt by Boeing's claims that Montreal-based Bombardier took advantage of Canadian subsidies to sell aircraft to Delta Air Lines Inc. at an unfairly low price. The Airbus-Bombardier tie-up was widely perceived as evidence Boeing's unwise war with Bombardier was backfiring. Boeing called the deal "questionable", but it apparently has no qualms about trying to mimic it, albeit at an even grander scale (Embraer's market value stood at about $3.7 billion before news of the talks came out).

It's an aggressive ploy that may go nowhere: the Brazilian government has the power to reject a deal and Embraer has historically been viewed as a paragon of industry for the nation. Reuters reported that the Brazilian government hasn't been involved in the talks. But the mere notion that Boeing would even consider this deal in some ways reinforces an argument that both Bombardier and Delta have made in the trade dispute: Boeing didn't have the right-sized aircraft to be a contender for the Delta deal. It wasn't harmed by unfair competition because it couldn't even compete.

Boeing has argued its 737 Max 7 passenger jet, the smallest of its upgraded planes, is actually comparable and may not survive because of Bombardier's low prices. That plane can carry a similar number of people as the Bombardier CS300, depending on how they're configured. But, one could argue, if the Boeing jet was such a clear outright competitor, why would it need to go through the regulatory headaches and financial cost of the Embraer deal?

Given Airbus' involvement with Bombardier, Boeing will need more heft if it wants to compete in the market for regional jets going forward, whether or not the tariffs proposed by the U.S. government hold. Buying Embraer would help solve that. The two companies already collaborate on research and the KC-390 military cargo plane.

But a deal with another planemaker doesn't do much for Boeing's goal of expanding into higher-margin after-market services. Any deal for Embraer, especially at the "relatively large premium" that's been reported, would soak up a decent amount of Boeing's financial resources and management time, raising questions about not only the commitment to services but also plans to return cash to shareholders. 

Boeing should stand to be a big beneficiary of the tax bill Congressional Republicans passed this week, giving it more cash to play around with, but as a matter of priorities, an Embraer takeover would seem to be pointing Boeing in a very different direction than what investors were prepared for. 

It also becomes even harder to argue, as Boeing has, that consolidation among its suppliers doesn't add value to the industry. The complaint -- leveled after United Technologies Corp. proposed to buy avionics maker Rockwell Collins Inc. for $30 billion -- was always a bit rich coming from a company that enjoyed an effective duopoly in the plane-making industry. It will look even more questionable should Boeing proceed to consolidate that market even further. An Embraer deal could help United Technologies in its quest for antitrust approval for the Rockwell purchase, eventually giving it more heft in negotiations with Boeing.

There are more than a few ways Boeing's journey down the rabbit hole on this Bombardier fight could wind up doing more harm than good.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

©2017 Bloomberg L.P.

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