First Degree Merger
/By Don Varyu
Apr 2024
ny town would be delighted to see a local startup grow into a global brand, with dominance in a huge and vital industry. And it would also be great if that same town could give birth to smaller brands that never reached outside the region, but generated loyalty, and even affection, from its customers.
Long before Microsoft and Amazon and Starbucks, Seattle had that industry-dominant behemoth in Boeing. And it also had a little local brand that represented the local fabric of the community in a pharmacy chain called Bartell Drugs.
In that sense, Seattle had it all; until each company was put on life support by a common enemy called “shareholder value.”
Capitalism is both good and bad. The good part comes from the magical mechanism that multiplies wealth through banking, markets and credit. It’s why America is the strongest economy on Earth.
But there’s also the devil called “growth”. In any business, at any level, good is never good enough. Capitalism U.S.-style will simply not reward you—or even respect you—unless you’re getting bigger. Always. The dreamy promise of growth from small, idealistic startup ventures is valued more highly than huge current revenues and profits. Report cards for publicly traded companies are issued every quarter. And a cruel judgment is always delivered withing the innocent-sounding framework of “shareholder value.” Increase it, and you’re good. Ignore it, and you’ll die.
And that’s exactly what’s happening now to both Boeing and Bartell.
Like anywhere, it would be wonderful to see a small enterprise help grow an entire region. For Seattle, that company was Boeing. It would be unfair to have described Seattle as a company town. But it was fully accurate to call it a place that was in love with that one company. Simply stated, even if you were the CEO of a company…or a chief of police…or even a star on the Seattle Supersonics of the NBA (RIP)...that really didn’t turn heads. But if you said you worked for Boeing, you got the same kind of look the Pope gets in the Vatican. People knew that Boeing stood for competence and stability and tech wizardry. To Boeing, the only thing that mattered was the quality of the products they made. Proud Seattleites were fond of quipping, “if it ain’t Boeing, I ain’t going.”
By now, it’s painfully obvious how that’s changed. A poorly designed, automated navigation system sent two of its airliners, and all aboard, to their deaths in separate crashes in 2018 and 2019.
Recently a “plug door” blew right off the side of the fuselage on one of its airliners in mid-flight. Somehow, no one was seriously injured. While investigating, the once buttoned-up company admitted it couldn’t even find the paperwork to determine who was responsible for not properly bolting the thing on.
Lesser reported was a recent random test of the oxygen masks on some Boeing planes--the ones that are supposed to drop from overhead for you to use in case of emergency. A full quarter—25%--were defective.
At Boeing, reliability is gone. And so is its reputation.
Bartell Drugs is a smaller company from Seattle you’ve probably never heard of unless you live there. It is the opposite of a business powerhouse. It was family-owned for three generations. Like Boeing, it was professional and reliable, but it also projected a trait that a global airline manufacturer never could. It was friendly. It was “your” drug store. And that strategy worked. It was the longest-operating family-owned drug chain in America. It was never huge—at its peak, it ran only 69 stores. But that size fit perfectly, for both the company and its community.
Well, things aren’t rosy at either company anymore. “Shareholder value” has destroyed the thing it was supposed to protect. It did that committing the same crime in two different ways: first degree merger.
At one time, there were three founder-operated airline manufacturers doing quality work in America: Douglas, McDonnell and Boeing.
But by the mid-60’s, Douglas was struggling mightily. Rather than letting its commercial business go bust, regulators allowed it to merge with McDonnell. That’s the way it could continue to build shareholder value.
The combined company produced some popular models under the Douglas “D” designation (DC3, DC9, etc.) But times demanded a bigger plane. Thus arrived the merger’s bigger, “better”, DC10—which was a disaster.
One chartered model crashed in 1972 in the Andes mountains, killing all but 16 members of the Ugandan rugby team. A second plummeted right after takeoff outside Paris in 1974—killing all aboard—ironically including the members of a British rugby team.
Then, in 1979, a DC10 taking off in Chicago saw its right engine disconnect from its wing, plummet back over that wing, and cutting off all navigation. It remains the deadliest air crash in U.S. history.
Not surprisingly, by the mid-90’s, McDonnell Douglas’ commercial business was on life support. Once again, regulators said the way to preserve shareholder value was another merger—this time with Boeing. Even though a monopoly was created, that certainly was the ticket to bigger market returns.
But something strange happened in the process. Somehow, despite being the powerful acquirer in the deal, Boeing surrendered leadership of the new company to executives of the smaller, failing McDonnell Douglas. McDonnell’s Harry Stonecipher took over as CEO. And boy, did he ever see the opportunity to boost shareholder value. Boeing’s proud and celebrated “association of engineers” yielded to the demand for higher profits.
Boeing moved its corporate headquarters to Chicago—where no aviation work is conducted. It moved a good part of airplane manufacturing to South Carolina, where no pesky unions exist.
Stonecipher later told the Chicago Tribune, “When people say I changed the culture of Boeing, that was the intent…so it’s run like a business rather than a great engineering firm. It is (still) a great engineering firm, but people invest in a company because they want to make money.”
When Airbus designed a far more fuel-efficient model, Boeing seemed certain to follow suit. But they didn’t. Instead, they decided it was cheaper to just retrofit its existing 737 model, extending the fuselage and moving the wings and engines further forward. This made the 737 Max prone to imbalance. Engineers saw the problem, and they told management. Management didn’t listen. Instead, they added a computer navigation override that was supposed to correct that.
In two tragic cases, it did not. Thus, the two 737 Max planes crashes in Indonesia and Ethiopia in 2018 and 2019. The computer override system saved no one.
The fate of Bartell’s is the same: slow death by growth-fueled mergers. But it’s told on a smaller scale.
______
By 2020, economics had made Bartell’s business model virtually unsustainable. International chains like CVS and Walgreens enjoyed huge economies of scale. At the same time, insurance companies were pushing people to fill prescriptions online. And the industry overall was suffering from a dire shortage of pharmacists and qualified assistants.
The grandson of Bartell’s founder decided he had no choice but to sell to a much larger competitor, Rite-Aid. That merger made Wall Street and shareholders happy. Bartell’s would be allowed to keep its name, but Rite-Aid would call the shots.
Perhaps predictably, Rite-Aid wildly overshot its ambitions--and its promises to Wall Street. Rite-Aid was forced to close more than half of its 5,000 locations. They had defied the growth gods.
And it didn’t help that they also faced multiple lawsuits for illegally filing prescriptions for opioid pain killers. (But hey, you’ve gotta grow somehow.)
However, Rite-Aid shareholders were saved exactly as you’d expect. A larger rival, CVS, bought them. But CVS had little regard for tiny Bartell’s. They began shutting down many Bartell locations, including one which was the last 24-hour pharmacy inside the city of Seattle.
Proposed mergers always come with promises of “eliminated reduncices” and “efficiencies.” What they never talk about is reduced service or reliability or safety.
And they never ever talk about destroyed reputation once it’s gone.
___
Boeing and Bartell weren’t just companies to Seattleites. They made us proud. They made us close.
They helped make us “us.”
Together, these companies were heroes; they helped tell the story of Seattle.
Now they lay mortally wounded.
Which leaves me wondering: without employee value, and comunity value, and reputation value—how can shareholder value ever be built?
Have a comment or thought on this? Just hit the Your Turn tab here or email us at mailbox@cascadereview.net to have your say.
