Steel investment and foundries have a long history. Looking back at the beginning of last century, Carnegie Steel was one of the largest steel companies at the time. Its valuation and pricing during mergers and acquisitions reflected some investment philosophies of famous business leaders like Carnegie and Morgan that are still inspiring today. For example, they did not overpay, but made valuation based on reasonable P/E multiples. In addition, precise valuation did not have to rely on complicated financial models or advisory from investment banks.
Steel companies were the equivalent of today’s tech giants in market value early last century
At the beginning of 20th century, the steel industry was the high growth industry like tech nowadays. When Carnegie sold his steel company to Morgan to form US Steel in 1901, it instantly became a company valued over $1 billion , which was rare at the time. And US Steel was added to Dow Jones Industrial Average on its first day of trading.
The historical largest M&A deal was quickly decided on a napkin
The M&A deal to consolidate all major steel players to form US Steel was historical, with a transaction value over $550 million. However, the negotiation and valuation process was very simple: Carnegie came up with a value of $480 million for his Carnegie Steel overnight, and simply wrote it down on a small piece of paper. Morgan accepted Carnegie’s asking price right away without negotiation. So even for a mega M&A deal, complicated financial models were not needed.
Valuation should be based on reasonable earnings multiples
Based on the profit level of Carnegie Steel, Carnegie’s asking valuation of $480 million represented about 12 times P/E multiple. Morgan admitted afterwards he was willing to pay even 14.5 times. So it showed that valuation should not be fixed on models, but rather based on reasonable multiples.
Steel has long investment horizon, premium should not be overpaid
Although US steel traded at much higher prices in the first two years after IPO, it soon declined significantly during industry downturns. However, Carnegie exited wisely before that as a financial investor, not overpaying premium while the industry was hot.
Precise valuation does not have to rely on investment banks
The historical largest M&A deal was decided between Carnegie and Morgan swiftly on a napkin, without relying on any investment banks. This shows precise valuation lies with experienced business leaders, not financial models or advisory from investment banks.
As one of the cradles of modern industrialization, the steel industry has a long history that still offers inspirations for investors today. Experienced business leaders like Carnegie and Morgan made valuation decisions based on reasonable earnings multiples, rather than overpaying during temporary booms. And precise valuation did not have to depend on complex analysis from investment banks.