Selling U.S. Steel for the Second Time

If regulators and shareholders approve, Japanese steelmaker Nippon Steel will acquire U.S. Steel by next October. As the pillar of U.S. industrialization during the late 19th century, U.S. Steel was legendary. But we most remember it as the first billion dollar corporation.

Through an excerpt from my own Econ 101 1/2, let’s take a look.

Selling U.S. Steel

Late 19th Century Consolidation

In the U.S., industrial consolidation began during the last quarter of the nineteenth century. In 1882 the Standard Oil Trust was formed. In 1887 American Sugar merged seventeen refineries. Having been validated by a Supreme Court decision in 1895 (the E. C. Knight decision), the American Sugar combination served as a model to be emulated. One by one new trusts were created. A cotton oil trust, the National Biscuit Trust, the tin plate trust. Meanwhile, American Telephone & Telegraph was gobbling smaller phone companies.

Carnegie Steel

In the steel industry, Andrew Carnegie was dominant. By the 1890s, Carnegie Steel controlled mines, railroads, ships, furnaces, and rolling mills. For each step of the production process, Carnegie had few people on whom he relied outside of his own empire. Professing that he disdained trusts and would never sell out, Carnegie tried to appear untouchable.

Other firms in the steel industry responded by trying to offset Carnegie’s power. Smaller steel companies combined and became the Federal Steel Company, the National Tube Works, American Bridge, and American Sheet Steel. Working together, they hoped to oppose Carnegie by no longer buying his raw ingots for their products.

Facing an array of opponents who wanted either to absorb him or to defeat him, Carnegie prepared for “war.” As he exclaimed, “Lose not a day . . . crisis has arrived, start at once, hoop, rod, wire, nails, mills. … Spend freely for finishing mills, railroads, boat lines….” In the tube business he opposed financier J.P. Morgan, against another enemy he constructed a massive rod mill, against Rockefeller he enlarged his fleet of ore-carrying vessels. When the opposition retaliated with higher railroad freight rates, Carnegie planned to enter the railroad business.

Forming U.S. Steel

Railroad and steel masters all feared what Carnegie could and would do. They turned to J. P. Morgan, hoping he could stop so destructive a conflict. Morgan realized that everybody has a price.

This takes us to a grand dinner held on December 12, 1900, attended by the giants of industry. The event was to honor “Smiling Charlie” Schwab, president of Carnegie Steel. After Schwab spoke to the assembled moguls, Morgan drew him aside with several questions. Thus began a series of meetings between Morgan’s people and Schwab in which each expressed his dreams for the steel industry. The result was an offer to Carnegie of $492 million for Carnegie Steel, from which Carnegie would receive over $300 million in stock and bonds.

Using Carnegie Steel as the foundation, Morgan moved onward to those who controlled raw materials and other steel-related enterprises to form United States Steel, a corporation with tangible assets valued at $682 million. Morgan then turned around and created $1,321 billion in securities. It was the first billion dollar corporation.

Back on Wall Street, selling U.S. Steel required a battalion of stockbrokers. Offered at 38, the price of the stock quickly rose to 55. The syndicate that underwrote the offering made $57.5 million. The house of Morgan received $11.5 million of the total. As other huge industrial corporations were listed on the NYSE, the creation of U.S. Steel marked a new era. .

The year was 1901.

Our Bottom Line: The Second Time

Now, 122 years later, a Japanese company hopes to buy U.S. Steel. Offering $55 a share, Nippon’s price is close to $14.1 billion.

It sounds simple. But, like everything, it’s not.

Globally, with China #1 in the steel industry, the Nippon U.S. Steel combination would make it #2. Meanwhile, in the United States, the steel industry is dominated by U.S. Steel, Cleveland-Cliffs, Nucor, and Steel Dynamics. Known for its older facilities, U.S. Steel is a high cost producer. If it had accepted Cleveland-Cliffs recent buyout offer, it would have remained a U.S. company. However, with the Nippon deal, regulators are concerned that it would become a subsidiary of a Japanese company. In addition, the Steelworkers Union opposes the deal as does Pennsylvania Senator John Fetterman.

Below you can see why again for U.S. Steel, J.P. Morgan would have said that everyone has a price:

My sources and more: Reading yesterday’s WSJ and AP articles about selling U.S. Steel returned me to my own research for Econ 101 1/2 (Avon Books/Harper Perennial). Also, do take a look at why Apple and U.S. Steel are similar. (Our share price graph was from Yahoo Finance.)