USX Restructure Imran Marri Paul Mulvey Josh Osborn
History of USX • Was founded in 1901 as US Steel. • JP Morgan purchased Carnegie Steel to form the largest Steel Co. worldwide. • First billion dollar corporation. • Responsible for two-thirds of US steel production.
USX History Cont… • Following WWII due to increased competition and high operating costs domestic market shares declined to 30%. • Foreign competition from rebuilt German and Japanese mills lowered worldwide market share. • American worldwide steel market share dropped from 20% to below 15% from the early 1970s to the early 1980s.
Major Restructuring @ USX • 1979: David Roderick begins restructuring upon taking over as CEO/Chairman. • Closed 13 steel plants, wrote off $3 billion. • Sold or Leased out various cement, timber, and mineral properties. • 1982: Bought Marathon Oil for $6.2 billion, used as an energy hedge.
More Restructuring • 1985: Roderick reduces steel production capacity by more than 30%. • Cuts 54% of white collar jobs. • Lays off 100,000 production employees. • Sold about $3 billion in assets. • 1986: Buys Texas Oil and Gas with $3 billion stock swap.
1986 • Officially becomes USX. • August: 44,000 United Steelworkers go on strike. • 5 ½ month strike – longest in American Steel history. • Stock fell to below 1954 levels, down to $14.50
The Icahn Factor • Wanted USX to either spin-off or sell off the Steel business. • Believed the Steel division was depressing the value of the energy division. • Executives considered selling or merging with Bethlehem Steel. • Icahn makes offer of $31 a share
Icahn Strikes Back • 1990 USX management decides to put Icahn’s proposal to a non-binding shareholder vote. • Vote fails by a 58%-42% margin. • Argues that as stand-alone companies respective shares would be $39 energy and $9 steel versus a combined share value of $35.
Managements Options • Partial IPO (“equity carve-out”) • Full-fledged Spin off • Sell off Steel Operation Completely • Targeted Stock • WHAT IS THE BEST OPTION????
Equity Carve-Out • Raise cash and provide a market for the steel equity. • USX must retain 80% of steel stock in order to maintain tax consolidation benefits. • Was dismissed because the different cycles of steel and energy made it very attractive to have these tax benefits.
Value Increases due to: Reduction of Agency Costs, due to more focused mgmt. More monitoring of new firm. Asymmetries of info: Company believes parent equity is undervalued. Incentive contracts based upon firm performance Value Decreases due to: Lose consolidated taxation benefit during downturns. Limitation on raised capital due to the tax consideration. (Can only sell off 20%) Carve-Out Pros and Cons
Value Increases due to: Agency Costs reduced due to focused management. Increased monitoring reducing capital costs Incentive contracts based upon firm performance Value Decreases due to: Loss of taxation benefits provided by consolidation. Full-Fledged Spin Off
Value Increases due to: Share price undervalued in subsidiary. Asymmetries of Info: Gains from avoidance of public issuance of subsidiary as a separate entity. Reduction in agency problems from increased management focus. Value Decreases due to: Increased taxes due to loss of energy hedge. Loss of debt capacity. Asset Sell Off
Value Increases due to: Increased market valuation of individual business units. Provides for different choices of acquisition funding. Separates dividends. Compensation based upon unit performance. Preservation of Tax benefit. Retention of existing synergies. Value Decreases due to: Continued exposure to combined entity liabilities. Board challenge to meet fiduciary duty to all classes of shareholders. Management conflict in different units arising from internal transactions. Targeted Stock
Best Option for Management • Management should pursue the targeted stock option because: • Continued tax benefit. • Focused management for individual units. • Market evaluation of separate units. • Continued levels of debt capacity. • Increased funding options for acquisitions. • Retention of existing synergies.