USG Corporation Harvard Case Solution & Analysis

USG Corporation Case Study Solution

Problem Diagnosis

USG was the largest building products company in the world and also the largest producer of gypsum in 1988. A proposed leveraged recapitalization plan had been announced by the board of the company on May 2, 1988 for thwarting the hostile tender offer in the form of cash by Desert Partners. One week is week before this tender offer would expire, and the shareholders of USG need to decide that whether they should vote in the favor of recapitalization plan or tender their shares.

Case Analysis

We analyze a number of issues within the case, before recommending the best course of action for USG.

Management of USG by Robert Day and USG as a takeover target (Question 1)

Many attempts have been made to takeover USG Corporation because of the steady cash flows, low cost production lines and the commanding market shares possessed by all the businesses of the company. Desert Partners was also one of the most experienced firms and it also initiated its efforts to takeover USG Corporation. The primary reason behind was the undervaluation of the shares of USG Corporation in the market and they had bought shares at around $ 40 per share and were willing to pay a premium to acquire USG Corporation. The recapitalization plan initiated by the board was a response plan to all such takeover efforts against the company.

Robert Day has done a great job after becoming the CEO in 1985 and he had also successfully completed the restructuring plan that had been initiated by the previous CEO in 1984. The stock performance of the company in 1985 and 1986 was outstanding and the company had generated huge profits in these years. The company had maintained double figure return on equity of 34% despite a slight dip in its net income in 1987. The dividends of the company had increased by 87% in the last 5 years and the share price had also increased by five times. His contribution could also be seen by his efforts for saving the company from takeovers and competitors like Desert Partners.

Response of Day to Desert Partners, Proposed Recapitalization and USG as a candidate of leverage recapitalization (Question 2)

If the tender offer by Desert Partners maximizes the wealth of the shareholders, then Day should think about it otherwise he should reject the offer. The takeover can be beneficial only if the price is correct. If tender offer is rejected, then this would strengthen the negotiation strategy of the company and Desert Partners would be forced to increase the price. However, the current bid is considered to be coercive, inadequate and unsolicited.

The proposed recapitalization plan is the best response to the tender offer. This plan would provide the current shareholders with a security over their equity interest in USG Corporation along with significant distribution of cash. Many other operational changes would also take place such as the installation of the system of the incentive plan for 215 senior managers of USG Corporation.......................

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