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Is Wilbur Ross Crazy?


A damp November wind blows off Lake Erie and across the Cleveland steel works, leaving a dusting of snow on the hulking metal buildings, many of which have long since fallen into disrepair. A rusting monument to America's industrial past, the Cleveland plant once employed some 18,000 workers who manufactured 500 different kinds of steel used in everything from General Motors (GM) cars to Maytag (MYG) appliances. These days, the sprawling site, which spans both banks of the Cuyahoga River, is largely still. Just two mills, manned by about 1,200 workers are still operating, although at something far below capacity.

To most observers, the Cleveland plant looks like the last gasp of a dying Rust Belt behemoth, but not to Wilbur L. Ross. Ross is a collector of the junked, the unloved, the wretched refuse of an economy that has mostly given up making things in favor of buying them elsewhere. Ross, who picked up the plant for a song in February, 2002, is almost laughably contrarian. In May, he added mammoth Bethlehem Steel to his International Steel Group Inc. He has also bet big on Japanese banks, Korean insurance, U.S. textiles, and telecom. All are part of his growing empire of the damned.

QUICK TURNAROUNDS

At 66, an age when peers are looking toward retirement, Ross is taking on more risk, bigger deals, and wilder bets than ever. Three years ago he gave up the security of Rothschild Inc., a global investment bank, where he had spent 24 years as an adviser to the creditors and stockholders of blowups such as Texaco, Eastern Airlines, and steelmaker LTV, to strike out on his own. Now he buys the stuff he used to just examine, a whole different magnitude of risk. "On the surface, it looks very scary," admits Robert J. Kolyer Jr., who oversees investments at Howard Hughes Medical Center, which has $46 million with Ross. "You have all these assets, but what are the future prospects?"

Kolyer is a Ross believer, but it's not hard to find skeptics. Ross has put millions into telecommunications, an industry with so much overcapacity that it will take years of brutal competition before all the excess fiber is put to use. He entered the decay of the U.S. textile industry on Nov. 11 with the $614 million purchase of Burlington Industries Inc. (BRLGQ), an international manufacturer of bedding, upholstery, denim, and other fabric. He has also bid $90 million for denim maker Cone Mills Corp. (COE), so far the only offer in an auction slated for Jan. 29. All this even though textile makers have cut 30,000 jobs in the past two years alone and are staring down the barrel of a total lift of tariffs on textiles from China and elsewhere in January, 2005.

Even in steel, where Ross has built his International Steel Group Inc. into a major player with a series of bargain-basement acquisitions, the jury is still out. "It's really difficult to tell how he's done," says Thomas J. Usher, chairman and chief executive of U.S. Steel Corp. (X), the biggest integrated steelmaker. Ross is taking ISG public this month, just as President George W. Bush's Administration is removing tariffs on steel imports put in place 18 months ago. ISG maintains that it can operate profitably without the protection. Indeed, the weak dollar, improved industry fundamentals, and Chinese demand seem to have overcome concerns about the lost tariffs, at least so far. The stocks of steelmakers have hit highs since they were removed, and the ISG IPO was oversubscribed at a higher price than initially expected. The stock was expected to begin trading December 12. Still, it's a turbulent time to be selling a deal, but that's familiar territory to Ross. It's not as though he hasn't known failure -- several of his recent deals outside of the U.S. have fallen apart.

That makes it all the more surprising that Ross has managed to produce returns for his investors that range from very good to downright spectacular in the nine funds he manages. Since their inception, he has outpaced the competition with annualized returns, net of fees, ranging from 8% in his hedge fund for foreign investors to 181% in his newest general fund. So if others think he's crazy, his investors just think he's smart. "When the phone rings, every idea Wilbur Ross is considering, we're considering," says Michael A. Wagner, investment director at the State of Wisconsin Investment Board, which has more than $225 million invested with Ross.

The world Ross walks in is politely called distressed investing. Less politely, it's vulture investing. It's a corner of the finance world dominated by big personalities who rise to prominence in times like these, the bust after a boom. Many of the bigger players, like TCW Group or Oaktree Capital Management LLC, look to buy up out-of-favor bonds cheap and flip them fast for a profit, often after some of the assets have been broken off for sale piecemeal. Others, like Leon Black's Apollo Advisors, take long-term equity stakes.

Ross doesn't completely fit either profile. He runs two hedge funds in addition to the private equity funds that have financed his bets on ISG, Burlington, and others. And he usually comes into a company as a bondholder but often surrenders some of his debt for equity, a riskier bet with more potential payoff. Other times, he buys assets straight out of bankruptcy court. He generally stays in at least a year and a half, sometimes longer. But Ross is looking for a relatively quick turnaround, a situation in which a new management or a new strategy or a cheaper way of doing business can lead to improved returns and a fast exit, often by selling to a larger, healthier rival. His fund agreements with investors cover a seven-year period: four to invest, three to liquidate investments.

And like the other denizens of this world, ultimately he makes money from others' misfortune -- or, as Ross would say, mistakes. "What we do is a very countercultural activity," acknowledges Ross, who in addition to buying distressed assets takes short positions in companies he thinks are headed for bankruptcy, profiting as their stocks decline. "Confrontational things, admission of error, admission of defeat, restructuring, laying people off: Those are not American ideals," he says.

Yet Ross sees a certain heroism in his role. He takes satisfaction, he says, from having saved jobs in steel, for example, that otherwise would have been lost completely. Even when he was a bankruptcy adviser, he says he mostly worked for creditors, who were in his view the victims, rather than management, whom he saw as the villains. He has described himself as a "guy who likes running into burning buildings."

He doesn't look it. A short man in wire-rimmed glasses, Ross has both the demeanor and the speaking style of an Ivy League professor. He asks short questions but gives long answers, and there's something vaguely patrician about the cadence of his speech. He spends his downtime at his century-old mansion in Southampton, N.Y., and his friends include theater owner Robert E. Nederlander and Massachusetts Senator John F. Kerry. Lately, he has been photographed at fund-raisers with New York socialite Hilary Geary, whom he's dating.

IN CONTROL

Twice divorced, Ross's second marriage was to Betsy McCaughey when she was lieutenant governor of New York in the mid-1990s. McCaughey, who came to the job as a policy expert and not as a politician, famously switched parties to run against her former boss, Governor George E. Pataki, a Republican. News of Ross's and McCaughey's engagement, marriage, and split made the papers on a regular basis. The divorce forced him to sell a collection of American Pre-Raphaelite paintings he had spent 15 years amassing, a bitter pill that many might have had trouble swallowing. Not Ross. He seems neither nostalgic nor angry. Instead, he has moved happily on to contemporary photography.

Indeed, despite the immense risks he juggles every day, friends and colleagues describe Ross as unfailingly cheerful. "I've never seen him angry," says Nederlander, a friend, sometime business associate, and frequent tennis opponent for 20 years. "He always has control over himself."

That sunny disposition is matched by a remarkably trouble-free upbringing. He grew up well-off in suburban New Jersey, the son of a lawyer father and a schoolteacher mother. Summers were spent at the Jersey shore. As a high school student, he commuted two hours a day to Xavier High School, a Catholic school in Manhattan, where he ran track and as captain of the rifle team set a national record. He went on to Yale University, his father's alma mater, where he worked on the literary magazine and the radio station. He started freshman year wanting to be a writer, but after a semester of a fiction class that demanded 500 words every day, he concluded that he'd "run out of material." A faculty adviser got him a summer job on Wall Street, and his path was set.

Ross, always good with numbers, honed his skills in research and analysis, eventually landing at Rothschild in the mid-'70s. There, he built his reputation as the country's foremost bankruptcy adviser. Ross saw himself as cleaning up the messy results of Michael Milken's junk-bond financings, but by 1997 he wanted to do more than just cajole others into doing it his way. For three years he ran a private-equity fund within Rothschild. But Ross couldn't invest in deals on which the firm was advising, shutting him out of one in three bankruptcies.

So in 2000, Ross left his comfortable office at Rothschild and opened WL Ross & Co. in New York with $440 million in investor money and a staff that included four top managers who, along with Ross, make up the firm's investment committee: David H. Storper, who runs trading; David L. Wax, a longtime workout specialist; Stephen J. Toy, an Asia expert; and Pamela K. Wilson, a J.P. Morgan & Co. veteran.

Although Ross has no succession plan in place, he calls this group the firm's next generation. Together, they run $2.25 billion in nine funds, including two hedge funds, two general funds, one that invests in Japanese real estate, and another focused on Japanese companies with corporate governance problems. Ross's firm makes a 1.5% annual management fee, plus 20% of all realized gains. The management fee alone comes to almost $34 million a year.

These days, Ross is once again regularly in the papers, but now it's usually for speaking out against foreign imports and in favor of protecting U.S. manufacturers with tariffs and tougher trade restrictions. Ross's bets on textiles and steel have made the debate critical to his portfolio, and he has become a fierce critic of China and what he describes as the stealth exportation of U.S. jobs. In both textiles and steel, foreign competitors are trouncing American companies, and Ross blames unfair trade policies for some of that.

Those are exactly the sort of conditions Ross looks for. He likes industries that are out of favor, the kind in which companies are forced to issue junk bonds that can be bought up cheap. His approach is to dig deep ahead of time into industries destined for a fall. Ross's goal is to know everything that can be known about a company before the bonds hit 70 cents on the dollar.

His rush into the Rust Belt started in earnest with his purchase in February, 2002, of the Cleveland steel mills and the other assets of bankrupt LTV Corp. Ross had been researching the steel industry for 2 1/2 years and had concluded that for steel to work, he needed to get the assets on the cheap and out of bankruptcy. Buying out of bankruptcy was crucial, because that would both erase the company's massive health-care liabilities and shift its pension obligations to the industry-funded government-run Pension Benefit Guaranty Corp.

By the time the remains of LTV were auctioned off, Ross had already lined up union support and a candidate for CEO: Rodney B. Mott. A Nucor Corp (NUE). and U.S. Steel veteran, Mott was using his considerable industry knowledge to scout out steel mills worth acquiring. LTV had been in bankruptcy for a year and had been basically shut down. Bigger deals would come, but Mott says he has never seen Ross happier than he was at the press conference after the LTV deal closed. For $90 million in cash, plus $235 million in assumed liabilities, Ross had gotten assets valued on the books at $2.5 billion.

But it's Ross's meticulous prep work that gives this deal the potential to pay off big. He began negotiating with the United Steelworkers of America back in the spring of 2001. The union saw the looming threat to its jobs and was willing to make concessions, but after decades of terrible relations with entrenched managements was making no headway. In Ross they found "a breath of fresh air," says USWA President Leo W. Gerard. "Wilbur and his people actually cared about what we had to say." One of the things they were whispering to Ross was that it would be much cheaper to start the massive steel plants back up than many thought.

There were lots of risks. No one had ever restarted a steel plant that had slowed to the point LTV had. And for almost a year, the new company, ISG, operated without a union contract on little more than a handshake. But that informal agreement with the union brass provided for far looser work restrictions and curtailed benefits in exchange for sharp management layoffs. The union, which had long argued the industry was burdened with overpaid managers, demanded that they, too, bear some pain. As a result, ISG was able to lower its man-hours of labor per ton of steel from two-and-a-half to one, a savings that equates to $45 on a ton of steel that sold for $300.

No one else in the industry had such a sweet contract, and it became Ross's strongest weapon. Meanwhile, Ross had been watching Bethlehem Steel and shorting its stock for a year before the company's bankruptcy in 2001. Although Bethlehem was three times the size of ISG in sales, its chief executive, Robert "Steve" Miller Jr., knew he couldn't compete against Ross's labor deal. Nor could he talk the union into giving him something similar. The only way the union would contemplate that was in the context of an ISG merger, says Miller, who left Bethlehem after the deal. "In fact, you could say it was almost to the point where no other solution was possible for Bethlehem because that's what [USWA President] Leo [Gerard] wanted." In May, Ross closed the Bethlehem deal, paying $1.5 billion for the company, making ISG the second-largest integrated steelmaker, behind U.S. Steel.

DEBT EQUALS CLOUT

Ross loves telling the story of ISG, though once it trades publicly he could start cashing out. In its filing, the company puts unaudited pro-forma revenue in the first nine months of this year at $3.9 billion, up from $3.7 billion in the comparable period a year earlier. Net earnings in the same period fell to $56 million from $190 million, due mainly to higher costs, including those of acquiring Bethlehem. And things will get tougher for ISG. It no longer has the flexible union contract to itself -- U.S. Steel has a similar one in place -- and the tariffs are gone. In a few more years, expenses like the relining of blast furnaces, at $100 million a pop, will come due.

It's hard to think of an old-line American industry with a bleaker outlook than steel, but Ross managed to find one in textiles. His push into that quagmire of foreign competition, bankruptcy, and job loss began with his purchase in November of Burlington Industries. By the time the rug, denim, and upholstery maker declared bankruptcy in November, 2001, Ross, who had studied the company extensively, had been shorting the stock for 30 weeks. "We had 30 or 35 contacts with management before they filed," says Ross, who gets updates on the firm's trading positions at the 8 a.m. staff meetings he holds daily. He says the short positions were pivotal to his quick action after the bankruptcy filing. Within two days, he had bought up enough debt to be the company's largest creditor at a cheap price.

It is an approach Ross likes. He buys at least one-third of the debt to ensure he has the clout to protect his interests. But the tactic can be controversial. At the bankrupt Cone Mills, unhappy stockholders and board members have accused him of conflict of interest. Ross is both a major bondholder and a bidder on its assets. Ross, they say, manipulated management into declaring an unnecessary bankruptcy in order to help him get control of the company. "Before I saw what Wilbur Ross has done with Cone Mills, I had respect for him," says Cone Mills shareholder and board member Marc H. Kozberg. "Now I have none." As usual, Ross remains unperturbed. He says he has no special arrangement with Cone Mills management and notes that "there isn't a deal we've done where there wasn't a conflict with someone."

Like all successful investors, Ross is strictly rational, never letting his emotions get the better of him. He doesn't pursue every lead. He says something like one-third to a half of the research his firm does never leads to a direct investment. As much as he may enjoy owning something such as, say, a steel mill, when it's time to move on, he doesn't hesitate. And there are some risks that Ross won't run. He avoids situations of what he calls "moral turpitude" that involve fraud or litigation. They're too difficult to assess, he says, and it can take too long to get out.

The other essential ingredient for successful investing is limitless energy, and there again Ross shines. He has been known to call fund investors on Christmas and to make fund-raising calls to the West Coast at midnight in New York. On a recent afternoon in his Manhattan office, he squeezed into a single three-hour block a one-hour meeting with a major Burlington licensor; a follow-up conversation with the guy he has picked to run Burlington, Joseph L. Gorga; the scheduling of a press conference; listening to a board meeting of his telecom company, 360networks; talking by phone with United Steelworkers leader Gerard; another call with ISG Chief Executive Mott; calls to a couple of politicians; updates on the day's market moves with his stock trader; several scrolling reviews of his BlackBerry; and repeated conversations with one of his two assistants, Gabriele, over his black appointment book. How can Ross bounce from one industry to the next in such short order? "You just have to compartmentalize," he says, as if anyone could do it if they tried.

Ross uses that boundless energy to dope out all the angles in his investments. His steel bet, for example, was contingent on the companies' filing for bankruptcy and thereby shifting their pension obligations to the Pension Benefit Guaranty Corp. People close to that agency say its view of Ross is that he benefited from PBGC getting hit with billions of dollars in pension obligations and then had the gall to take public credit for saving the industry. Ross acknowledges that the costs to the PBGC have been steep but says that the shift was made long before he bought their assets.

Ross doesn't hesitate to extract any advantage he can in Washington. A longtime giver to Democratic candidates, he was a major fund-raiser for Bill Clinton, but his pragmatic side has him courting the opposition at the moment. These days, he's down in Washington every week to argue his view on trade and the need to protect American jobs. With their eye on next year's election, lawmakers and the political staff at the White House have welcomed meetings with Ross. He has put together something called the Free Trade for America Coalition. With 70-odd members, the protectionist group ranges from labor unions to corporations to agricultural interests and is a formidable lobbying machine. He likes to portray himself as helping to publicize a groundswell of popular discontent at the demise of American manufacturing. But make no mistake: He expects WL Ross to profit. "We are not," he assures, "an eleemosynary institution."

So far he has shown an uncanny ability to correctly gauge the free-trade Bush Administration's political weakness in states dominated by industries looking for protection, like steel-making Pennsylvania and the textile-manufacturing states of the Southeast. A week after Ross bought his first steel mill, the President amazed many by slapping tariffs on steel imports. Although he has reversed course now, ISG benefited mightily from the 18 months of protection.

Ross has had more mixed results in his forays overseas. In the 1990s, his hunt for value took him to Japan and South Korea. At that time, few big investors had directly invested there. He hired local staff and structured his Japanese funds as joint ventures with local investment banks to raise money from Japanese investors. "The more we could have Japanese participation, the more ingrained we would become in the business community and the less vulnerable to criticism as outsiders benefiting from other's misfortune," says Ross.

UNHAPPY KOREANS

It has been a tough image to overcome. Ross brought $1.5 billion of foreign capital into South Korea, by his estimate, and in November, 2000, was awarded the Order of Industrial Merit medal of honor by then-President Kim Dae Jung. But today he has halted new investments into Korea. The failure of Ross in early 2002 to come through on a deal to take over part of Hyundai Group, after the government made some big concessions, angered many, though Ross says he and his investors were just looking for normal assurances. "He is certainly a person who amplified bad feelings about foreign investors among the Korean people," says Kim Sang Jo, a Hansung University economist who also heads an influential shareholder activist group.

The criticism doesn't bother Ross, who has scored many big wins in Asia as well. He doubled his money in Japanese Bank Kansai Sawayaka Bank this summer. After a year spent analyzing the bank, negotiating the right reserve levels with the government, hiring new top management, and arranging for the government to rehire the large chunk of staff he wanted to cut, the bank turned a profit in its first month under Ross. He continues to invest in Japan and argues that his relationship with the South Korean government is still good.

But Ross's bargain hunting has already taken him to a different part of the globe. He recently flew to Paris to meet with a group of private-equity investors there whom he hopes might join his group. "Europe is getting ready to blow up," he says matter-of-factly. Ross thinks disruption in the European Union consolidation could provide investment opportunities, and he finds the Europeans generally stuck in an old, unrealistic view of business.

The meeting in Paris took place on a Sunday. The next day Ross was on a plane to Miami for a textile meeting with Grant Aldonas, Under Secretary for International Trade, and a steelworker rally. Ross was the first member of management to ever address this union rally. He wore his steelworker's hard hat and got cheers. Then it was back to New York for more meetings. Ever value-conscious, he flew commercial. He always does. By Nanette Byrnes

With Moon Ihlwan in Seoul, Brian Bremner in Tokyo, and Michael Arndt in Chicago


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