USX Bows to Shareholder Pressure to Split Up the Company

question 147

Essay

USX Bows to Shareholder Pressure to Split Up the Company
As one of the first firms to issue tracking stocks in the mid-1980s, USX relented to ongoing shareholder pressure to divide the firm into two pieces. After experiencing a sharp "boom/bust" cycle throughout the 1970s, U.S. Steel had acquired Marathon Oil, a profitable oil and gas company, in 1982 in what was at the time the second largest merger in U.S. history. Marathon had shown steady growth in sales and earnings throughout the 1970s. USX Corp. was formed in 1986 as the holding company for both U.S. Steel and Marathon Oil. In 1991, USX issued its tracking stocks to create "pure plays" in its primary businesses-steel and oil-and to utilize USX's steel losses, which could be used to reduce Marathon's taxable income. Marathon shareholders have long complained that Marathon's stock was selling at a discount to its peers because of its association with USX. The campaign to split Marathon from U.S. Steel began in earnest in early 2000.
On April 25, 2001, USX announced its intention to split U.S. Steel and Marathon Oil into two separately traded companies. The breakup gives holders of Marathon Oil stock an opportunity to participate in the ongoing consolidation within the global oil and gas industry. Holders of USX-U.S. Steel Group common stock (target stock) would become holders of newly formed Pittsburgh-based United States Steel Corporation, a return to the original name of the firm formed in 1901. Under the reorganization plan, U.S. Steel and Marathon would retain the same assets and liabilities already associated with each business. However, Marathon will assume $900 million in debt from U.S. Steel, leaving the steelmaker with $1.3 billion of debt. This assumption of debt by Marathon is an attempt to make U.S. Steel, which continued to lose money until 2004, able to stand on its own financially.
The investor community expressed mixed reactions, believing that Marathon would be likely to benefit from a possible takeover attempt, whereas U.S. Steel would not fare as well. Despite the initial investor pessimism, investors in both Marathon and U.S. Steel saw their shares appreciate significantly in the years immediately following the breakup.:
-In your judgment, did the breakup of USX into Marathon Oil and United States Steel
Corporation make sense? Why or why not?

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