The comparable analysis shows that the company as awholehas potential in the market. However, because of its steel plant, the whole company is undervalued in the marketsince the downturn of the steel industry has given adverse consequences to the company. Whereas the energy division is not acyclical business.
The energy division has potential in the market. However, company’s overall position in the comparable analysis shows that there might be amarket inefficiency. If it is amarket inefficiency, then the comparable of USX should be at least the same as industrial, whereas the USX Corporation’scomparable are low.
Thus, we can determine that there would also be poor management in the company. Meanwhile, the company is not utilizing its resources effectively in the market as compared to its industrial counterparts. Even if the market is inefficient, USX’s performance should at least meet with the industrial average.
The arguments of Icahn were to spinoff or sell the steel division.It would increase the operational efficiency of the company. Meanwhile, the managers would be more accountable for their actions in the company. Similarly, he also argued that the two businesses would increase efficiency and create value for investors with different growth prospects and strategic directions.
On the other hand, he also argued that energy companies are trading higher multiple times than the steel companies because the energy companies are not acyclicalbusiness. Thus those companies have better business prospects. However, the steel industry is under industrial depression, and the cost of doing business is also increasing, whereas due to the steel division of the USX Corporationthe whole company is undervalued in the market.
Consequently, thecompany has anargument that spinning off or selling company’s steel division would create some complex situation for the company. Management argued that if thespin off takes place, it would not be clear that whether thecompany would be tax-free or not. It would beambiguous whether tax would be imposed on the steel industry.Therefore, thecompanycould be taxed double, once at thecorporate level, and once at shareholders level.
Similarly, management also argued that company would incur ahuge incremental cost if the company creates two separate entities. Meanwhile, all the agreements with the lenders are supposed to be renewed at new market rates, and at new conditions. The management has argued that the company would lose its image and potential value in the market if it separates or sells its steel division.As a result, the financial benefits of the diversification would be lost.
Furthermore, after analyzing the case and arguments of the CEO and management. It can be determined that the targeted stock would benefit the company rather than the spinoff becausethe company would be able to manage two different divisions having different shareholders in the market. Meanwhile, due to the steel division, there would be no effect on energy division.
The company should not consider any other option besides the targeted stock, spinoff, and equity crave-out because these three options are sufficient for the company to apply in order to avoid further disputes.Each option has its pros and cons. Although the best option for the company would be tochoose targeted stock option as compared to the other two options as it is more flexible than others and would meet the requirements………………
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