The latest $37 billion deal between Berkshire Hathaway Inc. and Precision Castparts Corp, the aerospace supplier, is pushing forward the consolidation of the fragmented aircraft component industry, all under the watchful eye of Boeing. The aerospace industry giant is determined to use its influence as the largest plane maker in the world, to determine which deals are the ones that actually go through.
The rising demand for commercial aircraft has triggered the interest of private equity and strategic buyers worldwide bringing them pouring into the sector. However, the ambitions of the China’s AVIC and UK’s Senior PLC, among others, might be curtailed by Boeing.
As a major buyer of aerospace supplies with an eight-year backlog of commercial jet orders worth nearly $431 billion, Boeing uses its so called ‘assignability clause’, inserted into most supplier contracts, to act as the unofficial regulator on aerospace mergers and acquisitions. The clause gives Boeing the right to refuse to transfer already existing contracts to new owners, allowing them a deciding vote over deals being made.
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While Boeing sees this as a legitimate way to have its voice heard in the mergers and acquisitions process, company owners and bankers have been warning that the prolonged time it is taking Boeing to give its approval might be putting deals at risk.
The process that used to take no longer than a couple of weeks, can now drag on for several months. Of course Boeing is reluctant to explain the change. One example is the purchase of LaCroix Industries by Liberty Hall Capital Partners, which took four months to get the green light from Boeing.
This is proving frustrating for all parties involved, as they can lose a deal over a delay that long. Spurred on by the costs caused by France’s Zodiac Aerospace’s failure to deliver premium seats in the first half of the year, which in turn delayed delivery of 787 planes to American Airlines, Boeing is in no rush to approve any new deals without careful consideration.
The fact that Precision Castparts has managed to secure key aerospace products and production capabilities by making strategic acquisitions and is now an essential parts supplier for both military and commercial aircraft, is making Boeing wary of having this situation occur again.