Bad Deal: LTV’s Acquisition of Jones & Laughlin Steel (1968)
Good Deal, Bad Deal

The purchase of Jones & Laughlin Steel plunged the company into the problematic and cyclical steel business, about which it knew nothing.

What Went Wrong:
James Ling and LTV succeeded because they continually acquired companies susceptible to asset sales, spin-offs, and other financial maneuvers. The purchase of Jones & Laughlin Steel plunged the company into the problematic and cyclical steel business, about which it knew nothing. The acquisition also provided Ling with no opportunity to exercise the financial legerdemain Wall Street had come to expect and reward.

Ling-Temco-Vought (LTV, though it did not officially adopt that designation until 1972) was one of the high-fliers during the Conglomerate Era of business deals in the late 1960s. Along with companies such as Textron, Litton, Gulf + Western, and ITT, LTV became involved in an endless series of purchases, sales, and financings that befuddled analysts and were generally seen as brilliant by an adoring bull market.

For LTV, it was one deal too many when the 1968 purchase of Jones & Laughlin Steel for $465 million brought the whole structure crashing down. It led not only to LTV’s crashing stock price and founder James Ling’s ouster, but also to a long, slow decline that ended in bankruptcy a 18 years later.

James Ling founded Ling Electric in 1947, with $2,000 in capital and his sales and electrical abilities. The company flourished, and by 1955, Lind was selling shares to the public out of a booth at the Texas State Fair. He soon recognized that his public status gave him access to three forms of currency to expand: cash (now more available as bank loans because his stock, with its liquidity, could secure it), stock (which could be issued in exchange for assets), and debt (now available though access to public debt markets).

Ling soon acquired the other components of LTV, as well as many other companies. When a falloff in military procurements in the early 1960s hurt the Chance-Vought operation, harming company-wide results (with regard to earnings and revenue), Ling vowed never to be too reliant on any one business.

To protect his company’s stock price, he also began to engage in constant recapitalizations, involving a dizzying array of spin-offs, holding companies, partial stock sales, debt offerings, warrants, and exchange offers. Some cleaned up the balance sheet, which ballooned with debt as a result of the myriad of acquisitions, and others appeared to increase value because they simply confused shareholders and analysts so much that they were willing to assume that Ling’s genius would make the deals work.

By the mid-1960s, Ling began acquiring other conglomerates. One profitable acquisition was Wilson & Co. in 1966. Wilson was a leading meat packer, and also had sporting goods, pet food, and pharmaceuticals operations. Wall Street referred to the company as “Goofballs, Golfballs, and Meatballs.”

Accompanying the transaction was the now-familiar round of divestitures, leasebacks, stock offerings, and debt financings. In 1968, LTV also acquired Greatamerica, which owned insurance companies, Braniff Airlines, and National Car Rental.

The stock market loved LTV and James Ling. LTV’s stock went from $10 to $10 per share during the 1960s. Ling was featured on numerous magazine covers. It was not uncommon to joke about conglomerates soon owning everything, and many financial people predicted that at some future time, the stock market would consist solely of large, diversified companies.

Whether LTV’s 1968 acquisition of Jones & Laughlin Steel (J & L) caused this vision to fall apart, or merely coincided with the demise of that vision, is unclear. It is clear, however, that Ling ignored numerous warning signs and proceeded, despite many good reasons for passing on this deal.

J & L was clearly undervalued, but that was all it had going for it. It was part of an industry Ling admitted he knew nothing about. It did not have assets that could be sold or spun off to assist in financing. It was a big user of capital and had a large unionized labor force. (Along with LTV’s later concentration on the steel industry, it was the multibillion dollar under-funding of pension obligations that pushed the company into bankruptcy in 1986.)

As a cash offer – $465 million to buy 63 percent – it put a terminal strain on LTV’s already huge debt. Finally, it provided a target for the government to take an anticonglomerate stand.

Although there was little basis, the new Nixon administration challenged the purchase on antitrust grounds. The challenge gave Ling an out, which he should have taken. He was having trouble selling assets and issuing stock and debt necessary to complete the purchase. Still, he pushed on, later settling with the government by selling Braniff and Okonite (a copper and wire company) and promising to do no big deals for 10 years.

By 1970, the acquisition had wrecked the company. It announced a 1969 loss of $38 million (compared with 1968 profits of $29 million). It stock price dropped back down to $10 per share. The debt issued in connection with these final moves traded at 15 to 25 cents on the dollar. In May 1970, at the request of the board of directors, Ling resigned.

Under CEO Paul Thayer from 1970 to 1982, LTV restructured and enjoyed some temporary success. It divested itself of nearly all its assets except steel, and acquired additional steel companies. Thayer’s successor bought Republic Steel in 1984, and LTV, still burdened by high debt, stuck with billions in underfunded pension liabilities, filed for bankruptcy in 1986.

Michael Craig

5/8/07

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