USX Corporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

USX Corporation Case Study Solution

Introduction

USX Corporation was founded in 1901 in United States by J.P Morgan. The USX has long history in the United States.Since, it was one of the largest steel company in the United States having long history and expertise in the steel industry. Indeed, it was only company in the United States that has market capitalization of $1.4 billion. It has mainly two divisions’ one is steel division and second is energy division. Meanwhile, the company has been operating in the market very well, and had become a major market player in the steel industry and energy industry.

On the other hand, the company also has vertical integration owing supplier of the raw material that gave the competitive advantage to the company over the all other market players. However, increasing complexities in the market has emphasized over the strategic moves in the market, to tackle the increasing complications of rising costs of doing business.Also, increasing competition in the market has created very worsts situation for the whole industry. Since, the energy division has good growth in the market,as it was season-oriented industry.

Furthermore, it was a major concern for the company to remain profitable and provide value for their shareholders.Since, the steel industry has been suffering from the major downturn in the market, due to the increased costs of doing business, and increased competition as well. Therefore, the company’s management and the CEO had arguments regarding selling the steel division complete, or spin-off.Some other options were also under consideration, such as targeted stock and equity crave out.

USX steel and Energy division

The company has good expertise in the production of the steel products in the market. Meanwhile, the company has experienced many structural changes in the company previously. Because, the company’s annual report in the 1982 has put it by defining the diversification of business divisions would provide value for the shareholders. Because, the company’s management had expected to support the steel division, by providing energy for the business to tackle potential threat from the downturn of whole industry.

On the other hand, it was also expected that, steel division would provide drilling and production equipment for the energy division. Whereas, it can be determined that, energy industry has good growth in the market. But, because the steel industry is cyclical and season oriented industry, so it was also suffering from the downturn in the country.Due, to the increased competition in the international and domestic market, also due to the introduction of new products like aluminum and plastic products that has hit the steel market.

Indeed, the USX Corporation’s share price was declining, due to downturn of the steel industry. On the other hand, the Carl Icahn had right argument that, the steel division was depressing the value of energy business. Because, the company had very diversified business therefore, downturn in any division has greatly affected the whole company. Hence, it can be determined that, the steel division has undervalued the whole corporation.

Value of the firm & Restructuring

The worth of the USX Corporation is $11.1 billion with some basic assumptions, such as the company would provide value for the shareholders and assuming the going concern that company would generate positive cash flow each year. On the other hand, it was also assumed that weighted average cost of capital (WACC) is 15%, and constant growth rate was calculated by multiplying the retention ratio with the return on assets. Similarly, considering these all assumptions company worth is $11.1 billion, calculated through free cash flow method.

Similarly, the stock price of the company was $38, due to the downturn decline in the steel industry and strike of the steelworkers against company resulted stock price declined at $14,which was the lowest price in the history of the company. Therefore, it can be determined that the company was undervalued in the market due to the steel division.Whereas the energy division has good prospected growth as compared to the other divisions of the company.

USX Corporation Harvard Case Solution & Analysis

Therefore, the restructuring in the company was very important to approach correct value of the firm as whole. Because, there were many options under considerations and arguments between the CEO,company’s management, and prospective investors that what should be a strategic direction for the company that could not only mitigate the undervalued firm’s value, and provide value for the shareholders. Indeed, each group had logical reasons against their arguments, but the main concern was how to restructure...................

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