Harvard Business School
Rev. July 12, 1997
On May 2, 1988, USG Corporation, the world's largest gypsum producer, announced that the board of directors had approved a recapitalization plan. According to the plan, USG would exchange each outstanding share of common stock for $37.00 in cash, $5.00 in stated face amount of 16% junior subordinated pay-in-kind debentures, and one share in the newly recapitalized company. Robert Day, USG’s Chairman and CEO, said the plan "is consistent with our commitment to maximize value for the shareholders while at the same time leaving them with an ongoing equity stake."1 On the day of the announcement, the stock price closed at $41.50, up $0.50. Before the board could implement the recapitalization, shareholders would have to approve it at a special meeting on July 8, 1988.
The recapitalization, however, was not the only option available to shareholders. Desert Partners, a Texas-based takeover group, had an outstanding tender offer for $42.00 per share in cash due to expire on June 10, 1988. In a publicly disclosed letter to the board, they had indicated a willingness to increase their offer to $50.00 per share in cash, debt, and stock, but had not officially changed their tender offer. Prior to the expiration of the tender offer, shareholders had to decide whether to tender their shares to Desert Partners or wait and vote for the proposed leveraged recapitalization plan in July.
In 1901, thirty-five gypsum companies consolidated to form the USG Company. The resulting entity controlled 50% of the highly competitive and price-sensitive gypsum market. Due to its size, USG had scale advantages in manufacturing and transportation which kept its costs low and helped it survive the Depression. Since its creation, USG had been a vertically integrated company with a commitment to product diversification. It grew steadily from the 1940s through the 1980s by expanding existing businesses and acquiring new businesses For example, USG acquired Masonite Corporation, a manufacturer of wood building products, in May 1984 to expand its product line.
Overview of Current Businesses
USG manufactured a diverse group of building materials for residential construction (36% of sales), nonresidential construction (29% of sales), building repair and remodeling (25% of sales), and
Anonymous, “USG Board Announces Recapitalization, Restructuring,” PR Newswire, May 3, 1988.
Research Associate Tara L. Nells prepared this case under the supervision of Professor Benjamin C. Esty as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The case was prepared solely on the basis of public information without USG Corporation’s participation. Copyright © 1996 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
industrial processes (10% of sales). It was vertically integrated and geographically dispersed controlling mines, quarries, transport ships and manufacturing plants in North America, Europe, Mexico, and other countries. Despite the foreign operations, 90% of the company’s sales were in the United States and Canada. Exhibit 1 gives historical data on the building products industry and the gypsum market.
USG divided its operations into four divisions: gypsum, interior systems, wood fiber and other products. The four divisions shared several characteristics: they had strong positions in their primary markets, typically first or second; led in...
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