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.
Carve-Out Pros and Cons
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%)
Full-Fledged Spin Off
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.
Asset Sell 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.
Targeted Stock
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.
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.
THE END