USX Corporation Harvard Case Solution & Analysis


USX Corporation originated in 1901 as the United States Steel Corporation (U.S Steel). It was formedby  J.P Morgan. The company has along history in the United States, of manufacturing, in the steel industry. Similarly, it was the only company with $1.4 market capitalization.Meanwhile, thecompany was also fulfilling two-thirdsof the steel requirementof the US market.It also has vertical integration. USX hasitsown supplier of iron ore, limestone, and coal, which is mined and transported to mills by the company’s supply team.

Furthermore, the market became very complicated since the steel industry has been on a downturn due to increase in cost of doing business and competition in the market. Meanwhile, the company’s top management took a restructuring initiative by selling many steel plants and instead acquiring marathon oil group as a step towards diversification.

However, the company’s CEO has argued that the company should spinoff or sell its steel division, which would bring operational efficiency in the company.Moreover,the company would be able to increase the value of its energy division. However, there were arguments between the CEO and management about the spinoff or total sale.

Meanwhile, there were many other options to adopt like targeted stock and equity crave-out.What option is feasible for the company to adopt, still remains a question. However, it is also important to know whether the market is inefficient or the management is poor. On the other hand, what does industry comparable analysis reveal about this complex situation.

Question 1

The Steel industry has been on a downturndue to increasing competition in the industry and also due to the introduction ofaluminum and plastic products in the market, which has proved to be unfavorable for the steel industry. However, the rising cost of energy has also contributed to thehigh cost of production. Whereas the cost of high production cannot be transferredto the customers. Hence, the company had to cut its total production capacity. Neverthelessthe industry is suffering as awhole.

Meanwhile, the company comparable analysisis the key indicator for evaluating the performance of the industry as whole in the market. Concurrently, if we compare the enterprise to sales multiple, the industry average is 1.70. Anenterprise to sales multiple shows how many dollars of the enterprise valuesare generatedfor one dollar of sales made by the company. See Exhibit 1

However, if we take a look at the USX Corporation, it has two different divisions ofbusiness. One is the steel division and the second is the energy division. The steel division has Ev/sales 0.54. This is below the industrial average. It reveals two issues, either the company is not using its resources effectively to generate sales as compared to the industry players or it can be determined that the company is attractive and undervalued. It is assumed that the company has good potential in the market to increase its enterprise value. If the company’s sales areincreasing but enterprise value is declining,it means thecompany is ina good growing phase. It has potential to expand in the market....................

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