HOLY ANGEL UNIVERSITY

Journal Review:
MERGER FOR MONOPOLY: THE FORMATION OF
U.S. STEEL

Presented by:

Manaloto, Edmon P.

(2nd Trimester, S.Y 2018-2019)

In partial fulfillment of the requirements for the

Master of Science in Accountancy

Presented to

Dr. Ma. Ferna Bel L. Punsalan

On

March 9, 2019
I. Background

This journal by Charles S. Reback of University of South Carolina Upstate talks

about how U.S. Steel was formed and the reason why it was established in the first place. It
revolves around 3 key theories on why the U.S steel was founded: to swindle the public, to
monopolize the steel industry, or to become a more efficient firm. To answer the question
of why U.S. Steel was formed, the author decided to examine the stock price reactions of
the securities of firms which were affected by the formation of U.S. Steel.

For a quick background, J. P. Morgan and attorney Elbert H. Gary founded U.S.
Steel on March 2, 1901 (incorporated on February 25) by combining Andrew Carnegie's
Carnegie Steel Company with Gary's Federal Steel Company and William Henry "Judge"
Moore's National Steel Company for $492 million ($14.82 billion today).

At the end of it, the journal concludes that monopoly is more consistent with
U.S. Steel’s operating structure than is efficiency. U.S.S. was organized as a decentralized
holding company, without much centralized decision-making.

II. Main concerns

Capitalists would always like a perfect monopoly, a structure in which one

person or group of persons owned everything: all sources of supply, all fabricating plants,
and all structures of distribution. Without competition, the individual or persons controlling
this monopoly would have no worry about labor interference or prices; the only concerns
would be production efficiency and profits.

One of the most famous monopolies in the United States, largely for its
historical significance is Andrew Carnegie’s Steel Company (now U.S. Steel). From the late
19th to the early 20th century, the organization maintained singular control over the supply
of its commodities. Without free market competition, U.S. Steel effectively set the national
price for steel.

III. Factors affecting the concern

The position of U.S. Steel as one of the most significant U.S. companies declined
over past years because of increased production around the world that resulted in the
decrease in the demand of steel on the U.S. market. China for example, has
approximately 10 times the steelmaking capacity of the United States. It has been accused
of dumping cheap steel on the global market to beat out competitors. Given the standard of
living in the United States and wages in the country, steel producers in other nations
produced the metal at lower prices as lower production costs, tariffs, and subsidies made
the steel from the U.S. uncompetitive.

The price of steel has a high degree of correlation with economic growth around
the world. Variants of steel are used in housing, transportation, industrial, automobile,
infrastructure and utilities sectors, making it one of the world's most versatile materials, one
that's easily reused and recycled. As economic conditions improve, the demand for building
and construction projects increases causing the price of steel to move upwards.

IV. Probable Solution

The United States Antitrust law was mentioned in this journal. The US Antitrust
law is a collection of federal and state government laws that regulates the conduct and
organization of business corporations, generally to promote fair competition for the
benefit of consumers. During the time when the U.S.S was formed there is a lack of
securities regulations, which could mean that public disclosure might not have been
immediate or complete, creating a potential problem. Furthermore, announcements were
hounded by rumors and possibly by deliberate misinformation.

The said law is the answer of the regulators to the dangers posed by mergers
that can potentially constitute a monopoly. These acts, first, restrict the formation
of cartels and prohibit other collusive practices regarded as being in restraint of trade.
Second, they restrict the mergers and acquisitions of organizations that could substantially
lessen competition. Third, they prohibit the creation of a monopoly and the abuse of
monopoly power.

In 1920 however, the U.S. Supreme Court held that U.S. Steel was not
a monopoly in restraint of trade under the U.S. antitrust laws. U.S. Steel controlled about
70% of steel production at the time, but competing firms were determined, more
innovative and more efficient with their 30% of the market. Eventually, U.S. Steel stagnated
in innovation as smaller companies was able to attract more and more of its market share.

V. Conclusion

Recently, U.S. Steel proposed a major reorganization of the entire U.S.

integrated industry. It began discussing a merger with bankrupt Bethlehem Steel. The
prospects for such a consolidation were not good. The consolidation would undoubtedly
meet strong protests by foreign governments for violations Antitrust laws and other trade
laws. At the beginning of the 21st century, the future of U.S. Steel and of the rest of the
U.S. integrated steel industry appeared cloudy.

The government is more likely to increase the range and power of antitrust laws
rather than relinquish such a useful weapon. Meanwhile, to survive, the U.S. Steel Group
kept boosting productivity by introducing new equipment at its mills. Throughout the
years, several dozen U.S. steelmakers filed for bankruptcy, but U.S. Steel survived. In 2014,
U.S. Steel was the 13th largest producer of steel in the world, according to the World Steel
Association.