Big Steel's frustrating battle to close ranks
Mergers. Executives in the steel business see them as a way to put some backbone into an industry doubling over from high costs, worldwide overcapacity, and inefficient plants.
LTV Corporation, for instance, is so intent on merging its Jones & Laughlin Steel company with Republic Steel that it's still pursuing the merger, even though the Justice Department blocked it last week. While it looks as if United States Steel is waiting for the final results on LTV, it does not appear to have dropped plans to acquire National Steel.
At the moment, LTV is back at the drawing board with the Justice Department's antitrust division. On Wednesday, it met with Justice officials simply to review numbers and get a better understanding of why the two differ in their opinions on the merger. They met again on Thursday, this time to start exploring compromises. Julian Scheer, vice-president of corporate affairs at LTV, said the company did not yet have a proposal to lay on the table at Thursday's meeting. He described it as ''very tough'' to come up with alternatives that meet the department's approval.
Mr. Scheer does not see many solutions to the ailing industry's problems other than mergers. ''If the Justice Department sends a clear signal that it is not going to allow mergers (in the industry), then I don't know what the alternatives will be. Then there will be a series of weak companies out there, because we have exhausted all other means.''
Mergers, he says, is the way to preserve the best of the industry and do away with the worst. If the two companies can get together, ''we could save more than in capital equipment avoidance costs,'' he said. He adds: ''There will be some job loss. However, that loss should not be anywhere near as large a loss as you would get with the two companies standing alone and having to shrink.''
What are the alternatives in the industry if mergers - as the Justice Department wants them - don't turn out to be a viable route?
Wendy Beale, a steel analyst at Smith Barney, Harris Upham Inc., a New York brokerage, doesn't see many. Foreign investment in the American steel industry is unlikely, she says, ''unless more quotas are imposed on imports,'' which she also thinks is unlikely.
Foreigners could be interested in joint ventures, says Ms. Beale, but ''they know what our plants look like, and they will only come in if they feel they are getting good technology.'' This does not match the American steel industry's goal: to unload the inefficient plants, not the technologically advanced ones. But old steel plants are hot potatoes. ''I doubt if any American investors want to get involved,'' she says.
Like most of the analyst community and the steel industry, Ms. Beale does not have kind words to say about the Justice Department's decision. ''I'm just appalled. I think it was really stupid . . . (LTV and Republic) had good plans.''
But the plans did not meet the Justice Department's criteria on market share. In 1982 the department began using a gauge, called the Herfindahl-Hirschman index, that measures market share. Combined, the two companies' capacity in stainless steel and carbon sheet steel topped the allowed market share according to the index.
The merger was blocked for this reason, and one other: Domestic users of carbon sheet (especially in cars and appliances) buy heavily from the domestic steel companies that make it. Together, Jones & Laughlin and Republic would have more of an opportunity to take advantage of this demand and raise steel prices, explains Helmut Furth, deputy assistant attorney general at the Department of Justice.
The point of argument in the department decision has to do with how it figured out the market share. When it looked at the domestic market for these products, it did not include imports from the Common Market or Japan, because these countries are restricting their US exports. The restrictions would keep these countries from naturally responding to new competitive conditions set by the merger. LTV says the department should have included them. Had it done so, the decision would have been more borderline, Mr. Furth concedes.
Now, LTV and Republic have to find some way to shed the extra capacity in those products. It will be difficult, because there are few buyers around. The Justice Department has suggested an industrywide effort to take certain plants off their hands.
