Usx: Targeted Stock Restructuring
CASENET, SOUTH-WESTERN COLLEGE PUBLISHING
Posted: 29 Aug 1996
Date Written: Undated
SUBJECT AREAS: "letter stock" or classified stock; conglomerate discount; financial restructuring.
CASE SETTING: 1991, steel industry, oil industry.
This case focuses on USX Corporation's 1991 decision to undertake a novel restructuring technique that has since come to be known as "targeted stock". This technique, devised by Lehman Brothers, is a descendant of the "letter stock" introduced by GM in its 1984 acquisition of EDS. It involves dividing USX equity into two "targeted" classes, reflecting the individual performance of its steel and energy-related operations. What is unusual about this deal is that unlike either a complete divestiture or a partial spinoff, no new corporate entity is created. That is, both the Steel and Marathon stocks are claims on the same corporation.Loosely speaking, the aim from USX's perspective seems to be to avoid some of the costs of remaining a conglomerate, while maintaining some of the benefits. While the USX case is the first example of targeted stock, several other companies have since used the technique, including Pittston, Ralston Purina, Fletcher Challenge, Seagull Energy, and Genzyme.Many of the key concepts in this case revolve around the strengths and weaknesses of the conglomerate form of organization, and the motivations for restructuring conglomerates. Related issues include the existence of a "conglomerate discount" in the stock market; the contrast between how internal and external capital markets allocate funds to projects; the distinction between the cashflow rights on securities, and their control rights; and the design of a sensible voting mechanism across the two classes of stock.One could use this case near the end of an advanced course in corporate finance, after the students have already been exposed to some of the important concepts associated with asymmetric information in investment and financing decisions; agency problems; and control rights and governance structures.
JEL Classification: G34, L61
Suggested Citation: Suggested Citation