International Steel Group is about to disappear as an entity.
In business years, it was a flash in the pan, emerging from the ruins of LTV in early 2002 as ISG, only to be acquired by billionaire Lakshmi Mittal in October 2004 and folded into the global steel empire to be known as Mittal Steel.
But ISG’s story isn’t another American Rust Belt tragedy composed of acts of mismanagement, unbeatable foreign competition and unyielding labor unions. It’s exactly the opposite: a glowing success story of how one leader came in and applied common-sense tactics to an old-school industry and became a winner in a landscape littered with losers.
Rodney Mott, the CEO of ISG who will become CEO of American operations for Mittal, understands the steel business. He has extensive experience in both integrated and mini-mills, including starting up new facilities. But maybe more important, Mott understands the people behind the steel business. He understands that people who have been making steel for most of their lives know the manufacturing end far better than anyone coming out of a college classroom ever could.
By keeping the steel workers focused on making steel and the businesspeople focused on running the business, Mott forged a partnership that transformed the bankrupt remnants of LTV into the largest and most successful integrated steel manufacturer in the country. Where once there had been only mistrust and dissension, there is now teamwork and profits. Union members actively make suggestions on how to improve efficiency and save money, and are actually listened to.
Under Mott, the steel industry’s business model was remade, and so was the company’s culture. Everything LTV did wrong in regard to workers, ISG did right. The union bought into the changes Mott implemented, and the company has celebrated success after success as a result.
“The biggest part of that is driven by Rodney Mott and his philosophy,” says Mark Granakis, president of the United Steel Workers Union Local 979, which represents workers at the Cleveland facility. “He says he doesn’t need to know everything about making steel because we do. You make the steel, I’ll make the money and I’ll share it with you. Nobody knows how to make steel better than the people that work there in the blast furnace. He respects the work force and the knowledge we have and what we do.”
By eliminating unneeded middle management (80 percent of the corporate staff was eliminated) and pushing decision-making down to the lowest level, Mott quickly won the respect of the union. To revive a failed company, it was vital to have everyone working together.
Before ISG, Cleveland steel-making was on the verge of extinction. But the right leader, with a dedicated financial backer behind him, refused to let the embers die.
In late 2001, LTV shut the Cleveland mill and was operating with a skeleton crew on what’s known as “hot idle” — keeping the mill fires burning to be ready to resume production on short notice in case a buyer was found. The company had been operating under Chapter 11 bankruptcy since December 2000 and entered Chapter 7 in early 2002. The future was bleak for steel-making in Cleveland.
But then Wilbur Ross, a New York financier with a $2 billion investment fund at W.L. Ross & Co., stepped in. Ross, known as the king of bankruptcy, loves ailing, heavily unionized commodity industries that others won’t touch. He’s labor-friendly and sees opportunities where others only see liquidation.
Where others pitched ideas to cut up the Cleveland plant and sell the pieces to the highest bidder, Ross made an offer to keep making steel in Cleveland. For $90 million in cash, plus the assumption of $235 million in liabilities, he netted all of LTV’s bricks-and-mortar assets, which had a book value of $2.5 billion.
Mott, with more than 30 years of industry experience, a respect for labor and a common-sense engineering background that helped with problem-solving, was brought in and installed as ISG’s CEO.
“Buying the LTV assets was one of the greatest bargains in the steel industry and one of the greatest bargains in manufacturing anywhere,” says Mott. “Every deal we’ve done since then, we’ve found a way to buy at a lower cost than anybody else.”
With a solid foundation and a capable CEO in place, Ross went on to buy and merge Acme Steel, Bethlehem Steel and two smaller producers into the ISG family, essentially remaking the entire steel industry in the United States.
Eliminating the legacy
As part of acquiring the assets of the steel-makers out of bankruptcy, Mott had a distinct advantage — ISG was not saddled with any of the legacy costs. Part of LTV’s failure — and part of ISG’s success — hinges on these costs.
U.S. steel-makers had large financial obligations to retirees in the form of health care and pension funding. It’s estimated that LTV added $40 per ton of steel produced to cover those costs. Bethlehem Steel, for example, had six retirees for every active employee, with an accumulated burden for those retirees of more than $5 billion.
“When Wilbur Ross and his investment team acquired the LTV assets out of Chapter 7 bankruptcy, they only acquired the bricks, iron and mortar,” says Mark Parr, managing director and head of the Metals Research Group for McDonald Investments/Keybanc Capital Markets. “They did not acquire a management team, a union, a labor force or any pre-existing contracts. It was literally a bunch of bricks and iron in the ground, so they were able to rebuild an operating strategy from the ground up. They literally had a clean sheet of paper.”
Without this burden, ISG was immediately more competitive than LTV had been. Eliminating payments to retirees didn’t make for positive public relations, but it did help the company survive.
“We are competing on a global basis with other companies in other countries that have national health care,” says Mott. “Health care should not be handled by businesses but handled through taxes, and our employees should feel comfortable and secure with their health care.
“I feel part of the group we left behind is the retirees, but in order to provide security for our employees and service our customers moving forward, we had to drop those legacy costs. It’s not something we are proud of, but it was a necessary part of the business.”
As part of the labor agreement, ISG contributes to a special health care fund for retirees once profits reach certain levels.
“Foreign steel had no legacy costs,” says Paul Singer, an attorney who represented LTV’s unsecured creditors in the bankruptcy. “The union recognized if they wanted to keep jobs, they had to make fundamental changes.”
And change it did. The number of job classifications went from 32 to five.
“It was a huge change in the way steelworkers think about jobs,” says Singer. “The concepts of co-pays and profit-sharing entered the contract. Pensions were gone and the medical arrangement changed.”
ISG lowered the company’s man-hours of labor per ton of steel from 2.5 to 1, saving $45 a ton. To not only get those changes but also create an atmosphere of teamwork required Mott to win the respect of the union.
“The most important part (of ISG’s success) was to re-establish a strong working relationship with the steel workers union and negotiate a new contract,” says McDonald’s Parr.
The contract was so successful that it became the standard labor agreement in the industry.
“The Cleveland works had lost its business to the mini-mills,” says Mott. “We came through here a couple of years ago and knew Cleveland had one of the oldest plants in the industry. Much to our surprise, we found it had some of the nicest facilities anywhere. The question became, how are we going to make us competitive? It’s going to have to be on productivity. We’re going to have to go out there and do what the mini-mills did and focus on cost controls, customers, and get every employee to buy into the vision. The way you have to do it is not how you negotiate but how you run the business and control y
ou
r costs. The union was not part of the problem.
“You can’t run this business without a skilled work force. I learned the business out on the shop floor from the steel workers. The guy on the floor knows how to run the machine safely and make the product with the best quality. We embraced the steel workers before we put a bid in, and it’s been a wonderful relationship.”
LTV had thousands of union grievances pending when it went out of business, according to the union’s Granakis. ISG has approximately eight grievances pending at the management level, and communication is open and ongoing.
“If you don’t violate the labor agreement, you don’t generate grievances,” says Granakis. “They’ve stuck with it. There isn’t anything that goes on that I’m not aware of. I work hand-in-hand with the vice president and general manager, who make sure I’m made aware of everything.”
The plant manager and a financial team now regularly present updates on the health of the company and its financial outlook.
“They share all the information about the plant,” says Granakis. “That never happened before. It’s an open-book and open-door policy. Under LTV, the management’s outlook was, we (LTV) run the business. We’re the bosses and you’ll do what we tell you to do. Now it’s different. They want us to share in the decision-making. If they are doing a capital project, they’ll explain why they are doing it, and we have the opportunity to explain how we might be having problems elsewhere and maybe should be spending the money there instead. It doesn’t always change it, but there are times when they look at something they hadn’t thought about.
“We really are part of the business.”
Making employees part of the business has been Mott’s goal has had all along.
“We let them share in the success and the vision,” says Mott. “We keep them informed so they can be part of every decision we make in the business. We get them involved and trust them to go out there and share the information and help us communicate this throughout the organization. We are building a culture of honesty and an understanding that we are all one team. It’s not us or them.”
There’s a simple motto Mott used at ISG to convey the overall attitude: Make it work.
Similar to Nike’s “Just do it,” it’s an attitude of getting things done no matter what the challenge.
International Steel had no international locations until it was acquired by Mittal. But that didn’t mean the company wasn’t thinking big early on.
“Somebody asked, ‘Where’s your international location? It’s not there,'” Mott told an engineering group early last year before the merger. “International is in the name because we focus every day on competing in a global industry. Our steel industry is global. There are competitors around the world and raw materials are coming in from around the world and we sell into markets around the world. Every employee needs to hear that every day.
“We are not worried about tariffs or import restrictions. We are going to focus on being a global competitor.”
Strength in numbers
The fact that ISG is becoming part of Mittal Steel is no surprise. Both Ross and Mott have realized all along that the steel industry is ripe for consolidation. It had to happen. It was just a matter of whether you were buying or selling.
“The way you strengthen any industry is through consolidation,” says Mott. “If you have a lot of weak companies out there vying for the same business, prices have got to go down. You are so competitive with each other you end up with cut-throat pricing where no one survives. That’s what happened to the steel industry.
“We were out there with 20-some different companies, but the customers were consolidated. If you go to the automotive industry, you have the Big Three taking on the little 20 in the steel business. The Big Three won and drove everybody into bankruptcy.”
ISG’s acquisitions rapidly made it the largest steel-maker in the United States. It was finally getting the leverage it needed to negotiate with large customers, but its status provided other opportunities as well.
“You can find new ways to make profits together, share technologies across plants and find synergies where some plants focus on certain product lines,” says Mott. “The Cleveland works focuses on a higher-value product, where Weirton (an ISG acquisition) focuses on a narrow product.
“Another term you hear is cannibalizing assets. We are not making capital investments at every location. We are looking across multiple locations and saying, ‘We have that asset in place, let’s work together and do it that way or go out and buy a facility that already has that asset and do it cheaper than what you could get it for with new equipment.'”
Consolidation also brings operational flexibility.
“If you only have one plant in a down market, the only choice is to run more volume through a plant because you have overhead to cover, which drives prices down,” says Mott. “In a big company, we can take a furnace down and still operate at 85 to 90 percent operating level and cover our costs and have a small margin.”
Now, as part of Mittal, that flexibility is increased even more.
“(The merger with Mittal) creates more flexibility as far as being able to move products around and optimize orders on given equipment that they have under their umbrella,” says McDonald’s Parr. “I think probably the most significant issue is the strategic change from being dependent for a percentage of their raw materials on global spot-markets to really being self-sufficient.”
Timing can be everything. Shortly after forming ISG with LTV’s assets, steel markets improved.
“Since the acquisition, global steel fundamentals have dramatically improved,” says Parr. “Strong growth in China has resulted in a shortage of raw materials on a worldwide basis. We have also clearly moved into a period of economic recovery. Demand for steel has picked up nicely, and demand outside the U.S. is strengthening. You put all those things together and … the price of steel has more than doubled from what it was 12 months ago (as of November).”
Ross’ timing with ISG has been impeccable. He floated an IPO for ISG in December 2003 for $28 a share, and in less than a year, sold to Mittal in a cash and stock deal worth $42 per share. The actual returns for Ross and his fund are even greater when you consider that Ross says he paid around $3 a share in equity for all five steel makers combined. Under Mittal, he will retain a large stake and a board seat, and expects the magic to continue.
“This transaction we are announcing is going to change the entire steel world map,” Ross said on a conference call shortly after the acquisition of ISG by Mittal was announced. “It’s going to provoke a lot of change in the rest of the steel industry, just like ISG provoked change in the American steel industry.”
New name, same principles
ISG will soon be gone, replaced by Mittal Steel. But this is a move that greatly strengthens Cleveland steel-making in a volatile industry where stability is key to survival.
“The cycles in the steel industry are extreme,” says Mott. “One day you are making a billion dollars a year, the next year you are losing money. You can only survive in that mode with a very strong balance sheet.”
Buying up bankrupt steel mills to become a bigger player nationally was the first step. Joining forces with a larger global organization was the next logical move for a company that has thought globally since Day One.
“(Mittal) is the largest and the financially strongest steel company in the world,” says Parr.
Will Mott be able to parlay his success at ISG to all of Mittal’s North American operations?
“I don’t see why he wouldn’t be able to,” says Parr. “What really changes for ISG is better availability of raw materials. There’s also a further enhancement to the underlying financial strengths of the organization — deeper pockets.”
ISG has been in a constant state of change since its inception, but in today’s economy, there’s no avoiding that.
“The world we live
in is a world of change,” says Mott. “We need to accept change. We need to be looking for change. We need to be trying to look for a way to do it differently day to day. I think that’s the kind of work force we have.
“Everything is decentralized. Every unit focuses on being a profit center. We do that with the relationship we have with the steelworkers. We’ve empowered them. We have the lowest cost operating units in North America. We took ideas from Nucor, Bethlehem, U.S. Steel and LTV. We blend it all together. Some of the company runs like an integrated mill, and other parts of it like a mini-mill. Some are like start-ups, some are like turnarounds.
“This is a commodity business. All of us recognize it’s not union and nonunion, it’s how you treat workers and how you work together. We feel our management team has done a very good job of that.”
The local union couldn’t agree more.
“It’s like night and day,” says the union’s Granakis. “They eliminated a lot of management people. They didn’t need as many foremen and middle management as they did before. They made those changes themselves without an agreement from us.
“Mott’s basic philosophy is the steelworkers know how to make steel, let them make steel. We don’t need someone looking over our shoulders all the time.”
In early 2004, Mott said it would be hard to survive in the steel industry if you are a small player. ISG, now part of Mittal Steel, has become THE player.
ISG as an entity may soon be gone, but with Mott heading Mittal’s American operations, steel-making in Cleveland has a bright future.
“Steel is a great industry,” Mott said last year before the merger. “Our country needs a strong industry. We have great facilities. We are going to focus on having the best cost structures to provide security to our employees and value to our customers.”
With Mittal, growth is still on the agenda.
“We are looking at opportunities to increase capacities,” says Mott. “Facilities are not being targeted at all for reductions or shutdown. We are looking to grow now that we have a partner.”
How to reach: International Steel Group, www.intlsteel.com.
