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Barriers to Exit – DEILY – December 2019 OECD discussion

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This presentation by Mary E. Deily, Professor Lehigh University, was made during the discussion “Barriers to exit” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/bte.

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Barriers to Exit – DEILY – December 2019 OECD discussion

  1. 1. Mary E. Deily Department of Economics Lehigh University Bethlehem, Pennsylvania USA 1
  2. 2.  Industry experienced severe contraction  Demand peaked in 1973; did not reach that peak again for over 20 years  New supply sources developed  In 1970: 19 firms in integrated steel; 17 in the Fortune 500.  By the early 2000s most had either been liquidated or had migrated to another industry  Exit barriers  Specific and durable assets (e.g., blast furnaces; coking ovens)  High closing costs (e.g., severance pay; pension liabilities; environmental remediation) 2
  3. 3.  Despite stagnating demand and increased imports, there was significant entry by minimills  Minimills produce steel products by melting steel scrap; scale is much smaller that for integrated firms  Market share grew from 15% in 1970 to about 45% in early 2000s  Growth made possible by willingness of firms to invest in new technologies that broadened their product range  In sum, exit barriers faced by incumbents may not affect entry or investment in R&D if entrants use different technology 3
  4. 4.  Bethlehem Steel built the last new integrated plant in the late 1960s  After that, plant closings and bankruptcies occurred in the 1970s, 1980s, 1990s, early 2000s): a long stretch  Why? 4
  5. 5.  Difficult to distinguish between cyclical and secular effects  For steel, particularly difficult because there were several recessions in 1970s and early 1980s  Forecasts made even in the late 1970s for U.S. demand in the 1980s were quite wrong  There is evidence that firms were reassessing their future in the late 1970s and early 1980s  Postponed and eventually cancelled expansion plans of early 1970s  More emphasis in Annual Reports that “all divisions” need to be profitable  Changes in nature of leadership 5
  6. 6.  Eventually firms began pressing labor for concessions, closed plants, accelerated their use of contracting out, and in 1986 disbanded their joint bargaining committee.  Is it different now in world more used to “disruption”?  Some firms will focus on core and try to survive  Staying specialized in steel was a failure: all firms that followed this strategy ended up bankrupt and liquidated; last was Bethlehem Steel in 2001 6
  7. 7.  Reorganizations helped some firms survive for some time  LTV: 14 years ▪ Bankrupt in 1986; reemerges 1993 ▪ Bankrupt again in 2000; assets purchased by Wilbur Ross (International Steel Group)  Wheeling Pitt: 17 years ▪ Bankrupt 1985; reemerges 1991 ▪ Bankrupt 2001, emerges 2003 ▪ Bankrupt 2012; assets sold 7
  8. 8.  Liquidations generally resulted in sale of some assets, frequently contingent on wage negotiations  Liquidations did allow creation of new firms; mostly smaller pieces of bankrupt firms but sometimes collections of plants: ISG  If an industry is declining, reorganization bankruptcies slow capacity reduction 8
  9. 9.  FFD exemption for merger makes most sense in an industry that is fundamentally stable or growing  In declining industry, capacity needs to exit so that price can rise a bit and survivors can cover costs  Nevertheless, pressure for exemptions likely greatest when entire industry is under existential pressure 9
  10. 10.  Best hope: synergies allow merged firm to become efficient competitor  Failed to do so in case of LTV Steel  LTV (Jones & Laughlin) acquires Lykes (owner of Youngstown Sheet & Tube) in 1978  LTV merges with Republic Steel in 1984  LTV at that point owned 3 of 8 largest steel firms in 1970  LTV bankrupt in 1986; emerges 1993; final bankruptcy in 2000 10
  11. 11.  Non-horizontal mergers? Study of different corporate strategies showed:  Diversify with conglomerate merger – USX -- very successful  Steel firms trying to migrate out by buying into new businesses and reducing stake in steel – mixed success 11
  12. 12.  Little evidence that incumbent exit barriers affected new entrants; maybe because their exit barriers were lower  High exit barriers did delay exit; aggravated by slow adjustment of expectations and reorganizations  Horizontal mergers did not create an efficient, viable competitor 12

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