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Chapter 15 Muted Optimism Storms always signal their approach. Winds increase, temperatures fall, and dark clouds gather on the horizon. When all of these occur at the same time and in the same place, there is no mistaking what is on the way. If changing business and economic conditions carried the same kind of forewarnings as nature, then U.S. Steel executives certainly would have been aware that something big—and potentially destructive—was approaching in 1985. The company was careful in how it communicated troubling news to stockholders, but the pattern of events that began to emerge during the year showed beyond any doubt that uncertain times were fast approaching. U.S. Steel’s 1985 annual report spoke of the company’s success in debt reduction, its capital expenditures, the strategic plan it continued to implement, and the diversification and restructuring that were part of its asset redeployment program. With regard to its diversification efforts , U.S. Steel made note of a merger agreement with Texas Oil and Gas (TXO) that was announced in October 1985. TXO, based in Dallas, was primarily in the natural gas exploration and drilling business and was viewed as adding a needed balance to Marathon’s oil business. TXO’s growth rate during the last few years and the company’s profit potential within the energy market were seen as good reasons for U.S. Steel to make its purchase. Final stockholder approval of the $1.3 billion merger would be announced on February 11, 1986. U.S. Steel once more touted its wise decision to purchase Marathon, both for the income it generated as well as the shield that the company provided against profit downturns in the steel business. Marathon had aggressively and successfully explored for oil throughout the world during 1985, and recently constructed oil platforms were just beginning to produce. All of this was good news. But readers of U.S. Steel’s annual report were jolted by some not-so-good news about oil. “World oil prices began to slide in 1985, and continued to slump in early 1986,” said the report. And the text continued with commentary on how such a slump, if not reversed, could severely slice into U.S. Steel profits. Oil consumers would be the beneficiaries of such a slide; oil producers and stockholders of oil producing companies would be hit hard. 190 Muted Optimism U.S. Steel’s 1985 sales and income figures already reflected what was happening in the marketplace. The company’s sales of $19.3 billion were up nearly $200 million from 1984. However, 1985’s net income had dropped from $493 million in 1984 to $409 million in 1985. What is even more revealing was the comparison between 1984 and 1985 income for U.S. Steel’s various industry segments. Oil and gas sales, which accounted for 54 percent of the company’s total sales for 1985, managed only to break even with 1984 income. Both years netted the same $1.274 billion. Income in the steel and related resources sector, accounting for 33 percent of total company sales in 1985, was abysmal. Income declined from $142 million in 1984 to only $27 million in 1985. Worse even were declines in U.S. Steel’s chemical and manufacturing/engineering sectors. Both accounted for a combined 12 percent of 1985 sales, and both recorded negative earnings for the year.1 Regardless of the failure of the 1985 oil and gas sector income to exceed the previous year’s income level, there was no denying that had U.S. Steel not had Marathon’s earnings to rely on but instead was forced to rely only on its steel sector earnings, the company would have been in dire straits. That fact alone helped to underscore the wisdom of U.S. Steel’s decision to purchase Marathon. Not to be denied either was the depression now affecting the entire American steel industry. And it was that depression that continued fueling U.S. Steel’s decision to rid itself of unproductive steel facilities. Productivity indeed was becoming a wedge issue in 1985 as the company readied USWA contract negotiations, set to begin in 1986 in advance of the current contract’s July 31 expiration. U.S. Steel asserted in its 1985 annual report the company’s determination “to remain the nation’s premier steelmaker,” but the company pointed to such hurdles in maintaining that status as “steel employment costs, plainly not supported by today’s steel...

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