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Does the U.S. Steel Deal Mark the End of an Era?

Motley Fool - Sat Dec 30, 2023

In this podcast, Motley Fool analyst Bill Barker and host Deidre Woollard discuss:

  • The arc of U.S. Steel over time.
  • Why Adobe might be giving up on acquiring Figma.
  • The changing environment for getting deals done.

Deidre talks to angel investor and author Bill Raduchel about how tech has changed over the past six decades.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Dec. 18, 2023.

Deidre Woollard: If you like the little M&A madness, buckle up. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard, here with Motley Fool Analyst Bill Barker. Bill, how's your Monday going so far?

Bill Barker: Monday is going well so far. Thanks for asking, and yours?

Deidre Woollard: Busy. Because one of the reasons I love hosting the show on Mondays is I never know what news I'm going to get. But the rest of the week you can see earnings, economic indicators. Monday is a wild card, but it usually involves some form of mergers and acquisitions. It's like my own version of the celebrity gossip, and we've got a makeup and a break up today. I want to start with the big one. This feels bittersweet to me as a student of US history and financial history. But, US Steel. Once the giant of the American economy, it's attached to all the big names like JP Morgan, being acquired by Nippon Steel for 15 billion. We knew that this was coming. US Steel has been entertaining suitors since the middle of the summer. It's a good deal for shareholders, but I don't know Bill, it's the end of an era. What do you think?

Bill Barker: Well, I suppose the era ended quite a while ago. Although US Steel is at the heart of a lot of eras, a lot of history, whether you're talking about monopolies, and the creation of regulation to thwart monopolies, you're talking about its role in war efforts, the creation of vast amounts of wealth, the creation on the other side of the rust belt, and so many other parts. You can tell the story of America over the last 130, 140 years or so pretty well by looking at different aspects of where this company has been. I think that where it has gotten too is not as interesting as where it's been.

Deidre Woollard: But, this is still a $15 billion deal. This isn't a company that is disappearing or anything, and it's still a valuable company. One of the things I try to ask with every deal these days is, is it likely to happen? Is it likely to go through? Because there's so many governmental regulations. What considerations do you think are going to go into this one happening or not happening?

Bill Barker: Well, the size of the deal and the size of the headline is not commensurate with the import of the company in the stock market for sure. It hasn't been in the S&P 500 for decades, and I was looking up what are the other similarly sized companies in terms of market cap, not in terms of employees or output. But going into this deal, it was about the same size as Etsy. You've got this picture of US Steel as being this gigantic important entity, and in terms of employment with 15,000 people, and that's largely a unionized workforce. That's going to be the biggest hurdle, I think, is getting any type of union buy-in. They've already announced that they're going to oppose this deal on various grounds, but I think ultimately on what it's likely to do to jobs in the US. Regulatory backdrop is not terribly favorable here right now for this, and the market is discounting a little bit despite how much the stock has gone up today, about 25-26%. There's still a gap between where the market is pricing the stock and the offer price.

Deidre Woollard: I think one of the things that's interesting too is that this was so much bigger than the Cleveland-Cliffs Steel that was supposed to happen. There's definitely some value here, and I think more so for Nippon Steel than it would have been for Cleveland-Cliffs. US Steel, they're going to keep their name in their headquarters in Pittsburgh, but it's obvious that the locus of building has shifted. China now dominates the world when it comes to steel. But China is also going through its own building crisis. We're looking at a fading industry, but not a disappearing one.

Bill Barker: No, not disappearing, still important in terms of what you do with steel, and construction, buildings, cars. There's plenty of work to be done on producing steel domestically, but the economics of it have not worked out for shareholders very well. If somebody else wants to give this a try. Yesterday's shareholders are willing to let them do so, I think. At the price that they're offering, maybe Nippon sees efficiencies that US Steel has never been able to effect. If so, then maybe it becomes an attractive economic deal beyond just making Nippon. I think the number 3 steel maker in the world in terms of tonnage, if it combines. I would assume that they see that this is a good allocation of capital, and more than Cleveland-Cliffs was able to offer. Cleveland-Cliffs is also up on the day. I guess the idea that US Steel makers have a price that is now being reset by this offer, so that's been to the benefit of the shareholders beyond US Steel.

Deidre Woollard: Yeah, good point. It is a reminder that today's hot industry is tomorrow's, oh, well, that was big once upon a time. You're right. Steel was once hell. There's Pittsburgh Steelers for a reason. But it's also a highly cyclical industry, and this is not the cycle to be investing in it, it seems like.

Bill Barker: No. Well, it was peaked in terms of output 70 years ago. It's been a long series of chapters of other competitors going bankrupt and US Steel being able to take over some of those. The largest company in the world once upon a time, and the center of the Carnegie story making, Andrew Carnegie, the wealthiest man in the world, Charles Schwab, the financier, and at one time CEO of steel companies. There's a lot of American history there, and it lives on in the form of the steelers and a lot of present day Pittsburgh, and what has been created by the steel industry over the decades and centuries. But it's not something that has the kind of economic returns that interest that many people.

Deidre Woollard: Well, let's move on and talk about a deal that won't be making it to the finish line. Adobe is calling off their acquisition of Figma. Figma is a design software company. It helps you design and build websites and apps, and things like that. This one seems to be a victim of regulators. They had faced friction from both the UK and the EU, they gave up before the Department of Justice rendered their decision though. They're going to pay $1 billion break-up fee. Should Adobe shareholders be happy about this?

Bill Barker: Apparently, they're happier to the tune of 2% today in the market. Market that's up about a half percent in the S&P, yeah, not disappointed that the purchase price at the time in September of last year, I guess was aggressive and part of this was being fueled by the stock as well as cash and Adobe stock is up about 100% over that time period and 75% this year. Shareholders are seemingly happy to not have the stock diluted for the acquisition of an entity that would have made lots of sense in Adobe's portfolio. But Adobe has products that compete with Figma. I think there was a pretty reasonable argument by the regulators on this merger that this was going to be anti competitive. That this was something where the consumer would do better with these two companies competing against each other than combining.

Deidre Woollard: Well, I think it's interesting to me because Adobe had their earnings last week. They were still saying they were going to wait, and they felt optimistic that this was going to go through. Now, it seems a little sudden to me that they didn't wait all the way to hear from the DOJ. I'm wondering if there's something if they took this opportunity because maybe they thought they were overpaying or something like that.

Bill Barker: I think the possibility that they were overpaying could have a role in it. I'm sure that discussions with the lawyers in the many jurisdictions where they were going to have to get this approved and what the tone was waiting around in the US for a new administration might be plausible, but in the EU and the UK less so. I think that on balance, they can do plenty without Figma. Figma can do plenty without Adobe and waiting around to fight this, what seemed to be long series of battles was not in the interest, apparently, of either party. But it does, as you point out with the declarations just last week, of what their intent and belief was about, how this would play out, you got to take that with a grain of salt on the public proclamations about how things are going to work out in situations that are outside of the hands of management.

Deidre Woollard: My wild theory and speculation is, hearing last week that Docusign is potentially exploring a sale. I'm like, oh, maybe Adobe wanted to put the money there. I don't think that's what's going to happen. I think private equity will probably grab that. But that was one thing that I was just wildly speculating on since it seems like Docusign might be being sold somehow somewhere.

Bill Barker: Somewhere, maybe they'd like it. I guess.

Deidre Woollard: That sounds like it.

Bill Barker: Better than some of the places that their stock has visited over the last couple of years since the peak craziness. If they can get something that's rewarding to today's shareholders, that's in their interest. But I think that the M&A market is healthier today, given the bull market moves in the last couple months and that's showing up in the news.

Deidre Woollard: Yeah, absolutely. At the end of the year, I was talking to Jason Moser last Monday and asked him, do you think we're going to see any more M&A for the rest of the year? He thought maybe. Certainly, since I talked to him, I think we've seen a couple of other biotech deals. But one of the things I think about these days is knowing how long every deal is taking. It's multiple years at this point and the risks for not getting approved are so high. As an investor, what do you think like when you hear of an acquisition these days? Are you just waiting and thinking it's not going to go through? How are you thinking about it?

Bill Barker: I would say that the environment is less favorable today than it's been most of the last couple of decades. Any deal should be discounted to a degree by that. The bigger the size and the more that tech is involved, that seems to be getting extra scrutiny. There are only so many levers that the regulators have currently to regulate tech. They can't get the lawmakers to give them additional power. The lawmakers seem to all agree that there should be far greater regulation. But what that is hasn't moved forward at all really. But what does exist is the power to stop mergers, and that prevents big tech companies from getting bigger faster to a degree. I think that that is a particular area where I would look for mergers to be getting large amounts of scrutiny and a bias against permitting them.

Deidre Woollard: Well, it's interesting because logically individual investors know like, OK, just because the deal is announced doesn't mean a deal is done, but the market doesn't seem to know that we get these wide swoops of enthusiasm and it really, it becomes that voting machine in the short term.

Bill Barker: Well, you've got certainly anybody that was short, the stock has to cover, or it is likely to. Situations such as US steals, there's an offer for 55 out there. The market, shot up to 50 at the open for its share price, despite the fact that it may not get approved. But it's certainly on, maybe this ends up being good news for the Cleveland-Cliffs merger. I don't know exactly how, but they seem to be seeing their stock price go up and that's the merger that would get much quicker approval keeping everything domestic. Yeah, it's always worth keeping in mind that a merger announcement is not the equivalent of a completed merger, but it indicates that there is interest at higher prices for the assets of these companies. That in itself is a reason for the stock to move higher.

Deidre Woollard: As an investor should, do you think people should? I mean, of course it's individual, but when all of a sudden a stock that you've had in your portfolio that is languishing along, all of a sudden spikes on a deal or a proposed deal. Is that the time to potentially consider an exit?

Bill Barker: If you like the price, yeah. I think that the price is for the acquired company is almost always not always, but almost always higher than, what the market price was. If you've got a valuation that makes sense to you to sell, then not waiting around for it might make sense, depends on your tax situation, depends on your other, it's a complicated portfolio question, but if you like the price, then that might be waiting around for those last two or three dollars may not be in your interest at times, it's very specific to the deal and the individual holding.

Deidre Woollard: Yeah, absolutely. Well, thanks for spending this M&A Monday with me, Bill.

Bill Barker: All right. Thanks for having me.

Deidre Woollard: The analysts to here on this show have a whole other day job. Providing premium coverage and recommendations for the Motley Fool suite of stock investing services. We are giving our listeners a discount on Motley Fool's flagship service. It's called Stock Advisor. If you're interested in more analysis from our team, two stock recommendations per month and access to Stock Advisor's full scorecard of companies. Visit discount. Once upon a time, you talk to computers by ringing a bell. I caught up with Angel investor and author Bill Raduchel about the past six decades in tech, messing with the laws of physics, and the difference between Apple and Xerox. Well, let's set the table a little bit by discussing what tech was and wasn't when you got started way back in this business. Because it is a very different world now.

Bill Raduchel: It's totally different. The first computer that the college I was at bought had only two ways to talk to it, a bell and a paper tape. You had a code, very complicated bell sequences. Or you otherwise you had to take a paper tape and go over to a Flexriter and feed the flexriter the tape so it would print out what was on the paper tape. The world's changed in every respect. The first computer I programmed had 10,000 characters in memory. My Apple watch has 128 gigabytes, 64 gigabytes, see millions of times more power. What we saw in the beginning did very specialized tasks, maybe fine, but they were very limited. Today, we're talking about artificial general intelligence on our phone that will be able to do almost all the thinking we do routinely in our lives. That's just night and day universe is away.

Deidre Woollard: Oh yeah, absolutely. I think one of the things that's interesting about that, and in reading your book is the early days of tech. Because nobody knew what was ahead, nobody knew what to pay attention to. It sounded to me like there were a bunch of missed opportunities, especially around data. If you could go back in time, what would you tell people to focus on?

Bill Raduchel: Privacy, security, and mental health. If there are three things that people missed, I assure you, no one up until the last five years ever talked mental health. Privacy? That's been around a long time. My friend and at that time, my boss Scott McNealy, in 1995 at a press conference on something else. A question was raised about privacy and he said there is no privacy, get over it. That was in 1995. That issue has been around a long time, but we haven't done much. The people who invented the Internet did an incredibly good job, but they thought it was going to be a million people. Now it's nearly five billion. The technology was great. It was a brilliant design, but they never thought about the privacy issues or the fact that when they designed the Internet, they designed it to be sessionless. Now that's a technical term, but what it means is that you can do things on the Internet without my identity, and so you have anonymity. This is really the first time, even when you go into a store, you're not anonymous because somebody is able to see you and recognize you. But there's the famous New Yorker cartoon, which I think has by far and away the most request for reprint, which is the one that shows the dog sitting at a console saying on the Internet, no one knows you're a dog. But we didn't think about the flip side of that. We didn't think about how this could be played out. We certainly didn't even think social media. No one thought of that, even today, we see people talking AI. The consultants or the advisors tend to have a trick question for the executive claiming they have an AI strategy and ask them what is their data strategy?

The person says, we don't have one. If you don't have a data strategy, you don't have an AI strategy because AI is fed on data. If you don't have the data, you can't feed the AI, so you don't have a strategy. A couple of things that I've learned along the way. One is that it's all laws of physics. If you don't understand what laws of physics you're changing and why that's going to enable a new round of innovation, then you probably don't really have the investment opportunity you thought you might have. Secondly, it's all people, and some people were able to sit there. Andy [inaudible] is badge number one at Sun. In 1988, he sat down with me and he explained to me the information environment we would have in our homes, then, '88, it's the one we have today with high speed internet and all these things. He did that in 1988. There are a handful of founders who are able to look out and see what these laws of physics dictate and which things will in the end win out. It was very clear even in 1988 that TCPIP, which is the foundation of the Internet It was going to win. It was going to end up being that was going to be the technology that won.

Everything else would take a long time to fade away, but that's where we are today. You have a single high speed IP connection coming into your house and that drives everything. He could see it. The change part of the reason I wrote the book was to make the point that none of this happened without people. It's easy to look at this stuff and say, but there were individuals along the way. It took work, it took engineers, it took people working long hard hours. It took deals between people that didn't want to strike deals to go make it happen. It's been a struggle. Rewarded some people beyond their dreams. But it's a very personal thing. I got to write the book because it comes out of a class I taught at Georgetown. I was asked to do the class by a friend, it was the Dean. He said, my students need to know what the real world is and there isn't enough real world. Please come in and talk to them about how the world really developed in terms of the things they're going to be doing and watching and observing. That's what started me and those lectures became the basis for the book and the chapters and stuff they rewritten. But that's really where the ideas came from.

Deidre Woollard: Well, I want to go back a little bit to some of your history because you have some of the great lines in the book that really helped me understand what things were like at a certain time and one of them was about Xerox. You called Xerox the most professionally managed company in the country at that point. But you also made the point that there's a big gap between professionally managed and best, so looking at that now, would you say that you see companies that are professionally managed right now, and do you see companies that are best managed right now and are there?

Bill Raduchel: Well, the comment that got me into trouble at Xerox, Deidre, was the comment that it was professionally managed but content free. [laughs] That the management process was largely devoid of a discussion around whether this was going to work or where the competitive advantage came from, or the core of what happened. But you could take the Xerox technology or techniques and apply to any industry. But if you didn't have the knowledge of the content, then it didn't matter. It was a way to make decisions. But unfortunately, another line is process effects, outcomes. Because you did things in that way, and Xerox always wanted evidence, and so they kept looking for evidence before they would spend money. Well, in technology that means you're always shooting behind the duck, as they say. If you want to shoot to where the duck is going to mix metaphors, you've got to be willing to act on knowledge and Xerox wanted evidence. You can't manage technology on evidence because by the time you've got the evidence, it's too late. You've got to be able to manage it on knowledge. To manage it on knowledge, you have to understand what it's all about.

Deidre Woollard: Is that why they missed the opportunity with Park where they had this great technology but they just didn't see how to use it.

Bill Raduchel: Well, it's a fascinating tale of two questions. Xerox management went to Park, saw the demo, beautiful. It was a wonderful system. It's as good as anything you got today in the office. They did it on much less powerful hardware. It was really an act of genius. The Xerox team said, great, we're going to bet on this, how much does it cost? Now this again is 1979, late '70s. We really say this question would be mid '80s, Xerox team said it would be about $50,000 a desk, 1985. Xerox built a business around it. Steve Jobs came and saw the same technology, and he went back to his engineering team and said, give me as much of this as you can for $2,000. Management asked different questions and they got good answers to both questions. But the Xerox answer, obviously never was going to be a mass product, whereas the Steve Jobs answer was the Macintosh. It's this professional management. They had a way of doing things and Steve Jobs didn't do it that way at all. He looked at it, said, this is the way computers are going to be forever that you can find a video clip of him saying that. Yet, he asked the question, how much of this can you do for $2,000? Xerox would never think of asking that question. For me, managing correctly was more important than getting to the right answer.

Deidre Woollard: Well, we started off talking about AI. I want to wrap up there because you've seen all of these different revolutions throughout your career. We're now in the middle of one. I'm sure you're seeing some of the missteps we're making, but also some of the opportunities. What are you hoping leaders pay most attention to?

Bill Raduchel: Well, I heard a statistic today that ChatGPT has 180 million registered users in less than six months. Now, if you look at the adoption of the consumer technology, it took color television 20 years. ChatGPT did it in four or five months.

Deidre Woollard: Yeah.

Bill Raduchel: To get an equivalent level of penetration. Obviously, this is the fastest being adopted technology ever. I don't know how sustained the usage is going to be. It's a new abstraction layer. If you look at the history of the computer industry, it is a succession of abstraction layers. In the beginning you wrote software to the hardware, then we invented an assembly language to make that easier. Then we invented compilers, Fortran, Cobol, Pascal, C, to make it even easier. Then we invented the desktop environment, even in the operating systems, they let you do things. Then we invented the Windows environment. The desktop environment back then became the Web. Now we're going to the next abstraction layer, which is AI. Every time you've changed abstraction layer, you've changed everything because it automatically absorbs all that's gone before.

It lets more people utilize technology and they get more power, quicker, easier, faster. The ChatGPT apps, it's a huge deal. The iPhone would be nothing without the App store. ChatGPT would be the iPhone. But now ChatGPT with apps is going to be like the iPhone we have today. First iPhone when a chip did not have apps, and see it didn't want to have a camera. People forget that, 15 years ago, but he didn't want it to have a camera, and he fought with the engineers on that and it didn't have apps. But it changed the world. Today that is the abstraction layer that matters. That's how most of the world accesses this technology. Now ChatGPT is going to come on top of it and the other ones, Claude, Anthropic there, Meta, Google, there'll be lots of them. I think the risk is way overhyped because they're going to be lots of things. But it suits the main people to get regulated because it keeps out competitors. If I'm a leader, I love regulation because it means my competitors have many more hurdles to overcome that I don't. That's why they favor it. But I know if you saw the announcement that company announced last week that they were putting $500 million worth of Nvidia processors on a barge, international waters so that no regulation would apply. That's the issue of the world. You think you can regulate, but what can you regulate if somebody puts the computers out on a barge in international waters, how do you regulate that? That's an old issue. There were pirate radio stations in the '70s in Europe. But the AI is a new abstraction layer. Every new abstraction layer has totally disrupted the world.

Deidre Woollard: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bill Barker has positions in Alphabet and Apple. Deidre Woollard has positions in Adobe, Alphabet, Apple, JPMorgan Chase, Meta Platforms, and Nvidia. The Motley Fool has positions in and recommends Adobe, Alphabet, Apple, DocuSign, Etsy, JPMorgan Chase, Meta Platforms, and Nvidia. The Motley Fool recommends Charles Schwab and recommends the following options: long January 2024 $420 calls on Adobe, long January 2024 $60 calls on DocuSign, short December 2023 $52.50 puts on Charles Schwab, and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.

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