Last week, in a bid to forge the largest U.S. steel company, Wilbur Ross' International Steel Group, or ISG, bid $1.5 billion to acquire bankrupt Bethlehem Steel. The transaction, which aims to unite the remnants of once-storied LTV Steel and Bethlehem Steel, would create a behemoth capable of cranking out 16 million tons of steel annually.
Nostalgia attaches to companies like Bethlehem Steel, which once employed 300,000 workers and provided the blue-collar muscle behind the last century's warships, skyscrapers, and grand public works. (Read a "Moneybox" about Bethlehem's glorious past and dismal present.) But Ross, the distressed asset investor who is angling to become a latter-day Andrew Carnegie, isn't looking backward. He wants to revolutionize how steel is made in the United States and how unionized steelworkers are compensated. And with a little help from a Republican administration that doesn't mind a little protectionism now and then, the longtime Democratic donor might succeed.
Ross, 65, has generally maintained a low profile. Like the president, he's a graduate of Yale and the Harvard Business School. Unlike the president, he's had a distinguished career in business. For more than two decades, Ross was a bankruptcy specialist at Rothschild. In the mid-'90s, Ross had a brief and unpleasant fling with fame as the husband of policy celebrity (if there can be such a thing) Betsy McGaughey. Read about their bizarre history
Two years ago, Ross left Rothschild to start his own fund. Going where U.S. investors fear to tread, he did deals in Korea and Japan: He is one of the few Americans to control a Japanese bank.
About a year ago, Ross turned his attention to the woebegone steel industry. Since 1998, some 30 U.S. steel companies have filed for bankruptcy, victims of excess global (and domestic) capacity, aggressive foreign competition, and high labor costs, and so-called "legacy" obligations—health-care, insurance, and pension benefits promised to legions of retirees. Ross figured he could remake the steel industry by circumventing the labor and legacy costs.
Legacy costs are a millstone around the shrinking industry's neck. In 2001, when it filed for bankruptcy, Bethlehem Steel's declining operations employed only 12,000 workers. But in addition to paying them high union wages, it also had to support the benefits promised to its 67,000 retirees in balmier times. With 500,000 retirees and a far smaller number of workers, the downsized steel industry is struggling under a $12 billion load of legacy costs. U.S. Steel, the largest American steel company for the past century, only had revenues of $6.4 billion in 2001.
Ross entered the steel business by buying the assets of collapsed giant LTV. In late 2001, nearly a year after filing for bankruptcy, LTV decided to liquidate rather than reorganize. Employees and retirees thus lost their benefits. In February 2002, Ross bought the carcass for $325 million. Because the company had liquidated, Ross did not have to assume any of the legacy obligations. Ross got a bargain, paying $11 per ton of steelmaking capacity when most steel companies were valued at $200 per ton of capacity.
The deal looked even better a few weeks later, when the Bush administration, eager to provide some relief to the battered steel industry—concentrated in must-win states like Pennsylvania and West Virginia—enacted 30 percent tariffs on many types of imported steel.
Suddenly, LTV, now renamed ISG, looked like it could be a going concern. It rehired 60 percent of LTV's employees and started making steel again but with a lower cost structure. Ross proclaimed his intention to reduce the number of man-hours required to produce a ton of steel by nearly 70 percent. Negotiating with unions de novo, ISG replaced lifetime pension and health-care benefits with 401(k)s and a tentative deal to tie other benefits to company performance. At ISG, workers received extra pay for beating production goals—a rarity under prior union contracts.
In December 2002, Bethlehem Steel seemed on the verge of liquidation, too. Already bankrupt, the company had stopped making payments to its severely underfunded pension plan. The federal Pension Benefit Guaranty Corp. agreed to take over the obligations. With one large legacy cost set aside, Bethlehem suddenly looked more attractive to potential buyers. So this month, Ross offered Bethlehem's unionized workforce a similar deal to the one he had offered LTV's former employees: Accept changes in work rules, benefits, and compensation in exchange for preserving of up to 60 percent of existing jobs. The deal is still pending.
And it's by no means certain that Ross can turn around the steel industry, or at least the large chunk of it he owns. There's still too much steelmaking capacity in the United States. Many consumers of steel are chafing at the price increases that followed the Bush tariffs. And last summer, LTV lost its largest client, General Motors. ISG, privately held, doesn't report numbers. So we can't tell if Ross is actually making steel profitably.
Ross is also taking a political risk. His strategy relies on continued help, if indirect, from the government."Our planning model is that workers get shutdown benefits from the [Pension Benefit Guaranty Corp.] and get some medical benefits from the trade act," Ross told the Wall Street Journal, referring to legislation that helps workers who lose jobs because of imports. If the Bush administration, which is trying to press free trade agreements around the globe, has second thoughts about the protective steel tariffs it enacted in 2002, the whole proposition might change. But that surely won't happen until after President Bush wins Pennsylvania and West Virginia in November 2004.