Not Even Bain Capital Could Save KC's Armco Steel
© Jack Cashill
As long as Mitt Romney remains a front-runner in the race for the White House, the media will treat us to a revised history of recent American capitalism so utterly Dickensian we will all be wanting to adopt orphans before the election season is over.
One such story comes out of Kansas City. In a weepy 3,000-plus word article, Reuters relates the sad demise of a once-proud Kansas City steel mill that employed more than 4,500 people at its peak in 1970, when owned by Armco Steel.
The UK Daily Mail threw its own headline on the Reuters morality play, and it pretty much captures the story’s soft-core Marxism, “The steel company deal that earned Mitt Romney millions while costing the government $44m and 750 people their jobs.”
In the way of background, Romney’s Bain Capital became majority shareholder in the century-old company, renamed GS Technologies, in 1993. By this time, the hometown company was racing to the bottom almost as quickly as today’s hometown Royals.
The mill’s equipment was largely obsolete. Its competition was increasing worldwide and upgrading. The employee base had dropped by more than 80 percent from its peak. And, critically, unlike many of its competitors, the mill had a union to deal with—a surly one, at that.
Although the Reuters editors chose not to explore larger trends, the Bain Capital makeover of this weary old mill was one small part of a major transformation of American industry, a transformation almost no one saw coming.
As readers of a certain age will recall, Ronald Reagan inherited an America deep in “malaise” when elected president in 1980. At the time, the future belonged to Japan—or so we were told. The wise men of American economics were encouraging us to mimic the Nipponese top-down “industrial policy” if we wanted to compete.
One of the wisest was future labor secretary Robert Reich. “Business enterprises,” he argued in his 1983 bestseller, The Next American Frontier, “will largely replace geographic jurisdictions as conduits of government support for economic and human development.”
Not all enterprises, either. In Reich’s America, federal largesse would descend like manna (with strings) on those businesses that had willingly restructured themselves along approved lines. The idea of “picking winners” excited the Beltway brotherhood. One of its most excitable, the 1984 Democratic presidential nominee Walter Mondale, enthused that Reich’s book “was one of the most important works of the decade.”
Happily, as it turned out, the Reichian model had little appeal beyond the I-495 loop. Mondale carried just one state, his own. In the rest of America, an entrepreneurial revolution had energized the nation’s would-be capitalists.
Bain Capital and other private-equity investors seized the momentum from the bureaucrats and saved us, at least temporarily, from the socialized stagnation now consigning the economic models of Japan and Europe to the ash heap of history.
The individual makeovers, however, have not all been pretty, and the GS Technologies deal is a case study of the same. The company went bankrupt in 2001. The question remains: who was responsible?
As the Daily Mail headline suggests, the media want to blame Mitt Romney, never mind that he had almost nothing to do with the deal on the front end, took a leave of absence immediately afterwards to run against Ted Kennedy, and left Bain altogether two years before the GS bankruptcy to rescue the Salt Lake City Olympics.
A high-level GS executive observes, “To be clear, Mitt himself was never involved in this investment at all, in any role except perhaps participating in the approval of the original investment.” He adds, “The spin of it makes me furious.”
Bain’s goal at GS, like elsewhere, was to create wealth, with jobs being a byproduct thereof. Says Howard Anderson, a professor at MIT’s Sloan School of Management, Bain was “never interested in driving companies out of business.” Adds Steven Neil Kaplan, a professor at the University of Chicago’s Booth School of Business, “Their overall performance was terrific.”
It is impossible to summarize in this space what went wrong in Kansas City. To balance the Reuters piece, I’ll try to make the case for Bain. For those wanting the union side, please Google the Daily Mail article noted above.
As both sides will agree, this was no hit-and-run job. GS was paying dividends by 1994. That same year, management announced plans for a $98 million plant modernization.
In 1995, Bain merged GS with a South Carolina firm to form one of America’s largest mini-mill steel producers. Bain reinvested $16.5 million of its earlier dividend to pull the deal off. When a global corporate giant, the Rotterdam-based Mittal Steel, reportedly offered to buy the company out at a profit to Bain, the Bain-backed management turned the deal down. Bain was giving GS an opportunity to succeed on its own terms as an American-owned company.
In a stab at fairness, the Reuters article quotes analyst Charles Bradford on GS Industries’ failure to survive: “If you look at the steel companies that went under at the time,” said Bradford, “all of them were unionized.”
My contact, who prefers to remain anonymous for understandable reasons, was more blunt. “The true villain in this tale was the Steelworkers’ Union,” he writes. “They had crippled Armco-KC, as they had so many other once-great companies, and were hell-bent on frustrating Bain or anyone else in restoring sanity to the un-real world they had created.”
This former GS exec calls the union “corrupt.” As he tells it, union leaders were “ideologically committed to making sure that private equity could not replace the old management/ownerships that they had beaten into submission over decades.” He adds unsparingly, “They were prepared to commit suicide rather than let Bain succeed, and they achieved their goal.”
Reuters does concede that a 1997 strike at the plant “turned nasty.” The union’s peccadilloes included the shooting of bottle rockets at security guards, pounding on the windows of vehicles as they left the plant, and flattening the tires of non-union trucks.
According to my contact, Bain made its share of mistakes. Its execs thought they could reason with the unions and out-negotiate Mittal Steel. They were wrong on both counts, and they paid the price.
Something like 77 percent of Bain investments have proved successful over time. Some, however, like GS, have had to shut their doors. The real problem is that government agencies, no matter how unsuccessful, never have to shut theirs.
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