CEO Wars!

Brit Ryle

Posted March 18, 2024

Steelmaker Cleveland Cliffs’ (NYSE: CLF) CEO Lourenco Goncalves just ripped his counterpart at U.S. Steel (NYSE: X) a new one, saying “These types of people need to go.”

Here’s the background:

Back on December 18, 2023, Nippon Steel won the bidding war for U.S. Steel (NYSE: X). The fourth-largest steel company in the world’s $55 a share bid easily beat the next highest bid, Cleveland-Cliff’s offer of $35 a share. 

U.S. Steel shares jumped 26% to $49.50 the next day, getting pretty close to the $14.5 billion valuation that Nippon’s offer implied. 

But things haven’t gone so well for U.S. Steel’s share price since then. The stock got crushed by 16% last week, falling to $39 after both President Biden and GOP nominee Trump said nope, not gonna happen…

Of course, both Biden and Trump are pandering to the US Steelworkers Union. And it is the Steelworkers Union’s political clout that gives it the power to make or break the deal. 

The Union wants written guarantees that all labor contracts will be upheld. While Nippon Steel has promised to uphold labor contracts, the merger plan does not include hard numbers to account for the labor contracts.

Union boss David McCall said, “They [Nippon Steel] say stuff in the press about how they’re assuming the labor agreements — but they aren’t…”

Bloomberg reports that Nippon has offered: “…a commitment not to lay off any steelworkers through Sept. 1, 2026 — when the existing labor agreement ends — and a commitment to not idle or permanently close any plants through the same period…”

That’s pretty obviously not a guarantee.

The M&A Game Plan

I am generally opposed to mergers and acquisitions. And it’s because they tend to follow the same game plan: fire a bunch of employees to boost profits so that management gets paid big bonuses. 

When you hear an acquiring company talk about the “synergies” and “productivity gains” that will be achieved from an M&A deal, what they mean is a lot of people are going to lose their jobs. This is one way the rich get richer…

Synergies and productivity gains make some sense if you’re a shareholder. The best way to get a stock price to move higher is to get profits also moving higher. But the formula isn’t always that simple…

Warren Buffett’s takeover and merger of Kraft-Heinz is a classic example of how “synergies” and “productivity gains” backfire. The Kraft-Heinz merger was completed in 2015, creating the fifth-largest food company in the world. Shareholders were probably happy when the stock was pushing $90 a share in 2017…

The calculus today looks pretty different: 7,500 employees were fired during the merger process, Buffett and his partner for the deal, Brazil’s 3G Capital, each put a few billion dollars in their pockets and Kraft-Heinz stock currently trades for $35 a share. 

Boeing (NYSE: BA) is another fine example of how cutting costs to boost profitability can do the exact opposite. I bet Boeing shareholders would gladly trade a few dollars in earnings per share to keep doors and wheels from falling off the planes…

You Get What You Pay For…

Going back to the U.S. Steel buyout, there was a huge difference between the two biggest offers, Nippon Steel and Cleveland-Cliffs. Nippon Steel offered $55 a share, or $14.5 billion while Cleveland Cliffs’ best offer was $35 a share, around $8 billion.

Why the big difference? 

Maybe Nippon felt it could spend more upfront because its plan for “synergies and productivity gains” meant it would make it up once it fired a bunch of people?

That’s basically what Cleveland Cliffs CEO Lourenco Goncalves said during his company’s last earnings conference call. I’m going to share a couple of his comments: 

“We are truly disappointed for the U.S. Steel employees, particularly the unionized workforce. There is only one reason the USW exclusively backed Cleveland-Cliffs and assigned to us the right to bid. It’s our proven commitment to not just preserve but to grow good American manufacturing jobs, good American middle-class jobs and maintain American ownership of industries critical to our national security and to our supply chains…”

The following is a real gem:

“We believe they [Congress] rightfully see this transaction with Nippon as proposed being bad for America and bad for American workers. As we all know, it’s hard to point out a single subject that can unify the positions and the opinions of Democrats and Republicans. At this moment in time, it would be seen as a miracle. Well, the unforced error made by the U.S. Steel Board of Directors was able to promote this miracle. That’s why we believe that the mistake will be fixed hopefully earlier rather than later.”

And finally:

“They [the U.S. Steel board] would like to break the back of the union. That’s what they are doing. Let’s talk Turkey here, that management team and that Board had one goal in mind, and the goal was to break the back of the United Steelworkers.

And by breaking the back of the United Steelworkers to break the back of the unionized labor in America. I am a big supporter of unionized labor because it goes against bosses like Dave Burritt [CEO of U.S. Steel]. These types of people need to go. So that’s my take on U.S. Steel. Do I need to give more color or that’s enough?”

Oh man: Shots fired! 

Cleveland Cliffs’ Lourenco Goncalves just became one of my favorite CEOs. 

Briton Ryle
Chief Investment Strategist
Pro Trader Today