Corporate Strategy

USX
NOTE 1 - The questions marked with a (*) are to be submitted before the beginning of the lecture by all groups (2
pages max report).

You have been asked by the USX management to evaluate the targeted stock proposal and more generally,
restructuring options for USX.

Targeted stock can be thought of as middle ground between the two extremes: remaining in a
conglomerate and a complete bust-up. There are, however, other alternative middle ground options. For
example, USX might perform a partial carve-out or a partial spin-off of the steel division. (The same could
also be done for the energy division). To do so, it would first create a new, distinct corporate entity out of
the steel division. It would then either carve-out (i.e. sell via IPO) or spin-off (i.e. distribute to existing
stockholders) a minority stake in this new entity, say 15% of the shares. Like targeted stock, this would
create a separately traded stock while at the same time keep the control of the two divisions under one roof.

Business analysis

1) Describe briefly USXs businesses. How well is USX doing from an operational standpoint? Where possible,
report and assess the relevant key performance indicators.*

Valuation

2) Is USX trading at a discount or a premium? What is the magnitude of this discount or premium in
percentage terms? (See the cases exhibit 1 but also the additional tables below).

Restructuring

3) Evaluate the pros and cons of the following four options for the specific case of USX:
a) Status quo (no restructuring)
b) Targeted stocks
c) Partial carve-out or partial spin-off of one or both divisions
d) Complete spin-off of the steel division
Be detailed and specific in your answer.

4) Decision time: On balance, what would you recommend USX management do?

NOTE 2 You might find the reference Berger, Philip G. and Eli Ofek, 1995, Diversification's effect on firm value, Journal
of Financial Economics, 37, 39 - 65 helpful to answer to question 2.

1
Steel companies Armco Bethlehem Steel Inland Steel
1990 1989 1990 1989 1990 1989
Revenues 1,735 2,422 4,899 5,251 3,870 4,147
Restructuring charges 0 43 550 105 0 0
Operating profit 77 116 -443 267 2 231
EBITDA 117 173 -137 592 121 362
Net income from continuing operations -63 202 -487 219 -48 113
Net income including discontinued -98 157 -463 246 -48 113
operations and extraordinary items

Long-term debt (at year-end) 367 423 590 656 692 578
Preferred stock (at year-end) 93 93 308 320 339 339

Per share
Net income from continuing operations -0.71 2.28 -6.45 2.93 -1.41 3.15
Net income including discontinued -1.10 1.78 -6.45 2.93 -1.41 3.15
operations and extraordinary items
Dividends on common stock 0.40 0.30 0.40 0.20 1.40 1.40

Common stock
High 11.250 13.500 21.125 28.500 36.375 48.500
Low 3.875 9.500 10.625 15.375 20.875 31.375
At end of year 5.125 10.750 14.875 18.500 24.750 33.750

Book value per share 9.54 10.98 15.56 22.37 41.27 43.00

Shares outstanding at year-end (millions) 88.5 88.4 75.9 75.2 30.9 34.7

Energy Companies Amerada Hess Atlantic Richfield Phillips Petroleum Unocal

1990 1989 1990 1989 1990 1989 1990 1989
Revenues 7,081 5,679 19,896 16,815 13,975 12,492 11,808 11,353
Restructuring charges 0 0 0 0 0 0 0 0
Operating profit 706 618 2,568 2,209 1,435 1,073 625 685
EBITDA 1,450 1,164 4,290 3,957 2,243 2,179 1,649 1,558
Net income from continuing operations 483 476 1,685 1,949 541 219 401 358
Net income including discontinued 483 476 2,008 1,949 779 219 401 260
operations and extraordinary items

Long-term debt (at year-end) 2,532 2,348 5,997 5,313 3,839 3,939 4,047 3,887
Preferred stock (at year-end) 0 0 0 0 0 0 0 0

Per share
Net income from continuing operations 5.96 5.87 10.20 11.26 2.18 0.90 1.71 1.53
Net income including discontinued 5.96 5.87 12.15 11.26 3.13 0.90 1.71 1.11
operations and extraordinary items
Dividends on common stock 0.60 0.60 5.00 4.50 1.03 0.94 0.70 0.60

Common stock
High 56.000 51.875 142.250 114.375 31.125 30.125 34.500 31.250
Low 42.875 31.000 105.500 80.375 22.500 19.125 24.625 18.875
At end of year

Book value per share 38.34 31.69 44.83 39.64 10.51 8.74 10.87 9.83

Shares outstanding at year-end (millions) 81.0 80.8 158.9 164.2 258.7 243.9 234.5 234.0