Why Yugoslavia had to be destroyed

Louis Proyect lnp3 at SPAMpanix.com
Thu Oct 12 08:42:35 MDT 2000


Wall Street Journal, October 12, 2000

U.S. Steel's Plunge Into Slovakia Reflects an Urgent Need to Grow

By ROBERT GUY MATTHEWS  Staff Reporter of THE WALL STREET JOURNAL

KOSICE, Slovakia -- Desperate times in the American steel industry have
driven U.S. Steel to its riskiest and biggest move in decades. USX-U.S.
Steel Group is expected to announce Thursday the last step in its
acquisition of Slovakia's Vychodoslovenske zelziarne AS, or VSZ, which
represents most of the country's steel industry. All that's left is the
almost-certain approval Thursday by VSZ shareholders.

The vote will bring to an end a three-year seesawing process that U.S.
Steel embarked on to break out of the tough American market and break into
the more promising one in Eastern Europe. The price could total $1.2
billion in acquisition costs, debt assumption and planned investment. The
deal will nearly double U.S. Steel's current work force of 18,666 workers
and increase capacity by a third.

That's a lot to pay for a messy former communist operation that produces
low-end product with a bloated work force, has a rocky reputation in the
industry and only recently cleaned up long-running corruption problems
enough to avoid bankruptcy and put a little black ink back on its books.
But for the largest U.S. steelmaker, which has an urgent need to grow and
sees few avenues for expansion at home, VSZ is an unavoidable case of
taking the bad with the good.

'There Is Some Risk'

For "a traditionally conservative company, this is not a conservative
move," says John Goodish, the U.S. Steel executive who led the scouting
party that found VSZ and will serve as the subsidiary's president. "There
is some risk."

Much of VSZ's internal troubles emerged while it was headed by Alexandr
Rezes, whom current VSZ officials have accused of siphoning money from the
company. In 1998, the company recorded a loss of $11.6 million, compared
with a profit of $2.7 million two years earlier. Mr. Rezes, whose
whereabouts are unclear, couldn't be reached for comment.

After Czechoslovakia split into two countries in 1993, the Czech Republic
went on to become an economic power in Eastern Europe, while Slovakia was
saddled with the fading industrial factories. For the next five years,
under Vladimir Meciar, Slovakia's embrace of democracy was patchy, and its
move toward a market economy was slowed by the government's cronyism and
fiscal mismanagement. Mikulas Dzurinda, an economist, took over in 1998 and
has pushed the country to strive to join the European Union and attract
foreign investors.

Strain and Nostalgia

The Meciar legacy has lingered in economic strains and some nostalgia for
the old days. Unemployment stands at about 20%. Wages have declined 15% in
the past decade, and prices for oil, gasoline and food have risen about
50%. Older citizens are especially fed up with the changes and are mounting
a political campaign to return to communism.

This is the environment in which U.S. Steel hopes to improve its fortunes,
thanks to Mr. Goodish and his boss, John Connelly, vice president of
long-range planning and international business. They are the ones who
brought VSZ to the table, and they are charged with making the renamed U.S.
Steel Kosice work.

U.S. Steel's journey to Slovakia began three years ago in the company's
home office, 60 floors above downtown Pittsburgh. Paul Wilhelm, president,
told his top executives they had no choice but to expand the company. While
U.S. Steel is No. 1 at home, globally, following seismic shifts in the
industry, it doesn't rank among the top 10.

Problems at Home

Around 1978, many U.S. steelmakers were on the verge of bankruptcy or
insolvency. Mills were using obsolete equipment, dependent on expensive
sources of iron ore and coal, tied to restrictively high wages and
counterproductive work rules. Foreign rivals were faster and cheaper, and
they were aggressively invading American territory. By 1998, like the rest
of the domestic industry, U.S. Steel had spent the previous 20 years
closing mills and selling off assets to stem losses arising from those
problems.

Now, if U.S. Steel wanted to be a serious contender beyond its own shores,
it had some growing to do. Mr. Wilhelm told his top executives to find an
integrated steelmaker, the traditional large-scale operation that makes
steel from scratch, and he named Messrs. Goodish and Connelly to lead the
search party.

They found nothing in the U.S. worth buying. Although stocks of domestic
steel companies were trading low, and the companies could have been
acquired cheaply, they were saddled with huge legacy costs that domestic
steelmakers carry, mainly the hundreds of millions of dollars that would
have to be paid in steelworker pensions. "Market cap isn't true acquisition
value," Mr. Wilhem says. "We don't think there are a lot of opportunities
in the U.S. for us." Minimills, which melt down and reprocess recycled
steel, didn't make sense, because they don't serve the same customers or
use the same distribution and raw materials.

The two executives looked outside the U.S. in Western Europe, South
America, Mexico and Asia. But those markets were already either too
competitive or expensive and dominated by giants such as Germany's
ThyssenKrupp AG.

Messrs. Connelly and Goodish focused on developing nations, where steel
consumption was expected to rise and there was little competition in
higher-end steel.

Engineers for USX's consulting unit were working for VSZ in 1997, helping
it update and refine its automated machinery. The engineers saw great
potential. Production costs were low, largely because of low salaries, and
much of the equipment was new and already paid for. It had limited itself
to low-grade steel for other Eastern European markets and hadn't even
considered the potential profit in premium steel used for cars and
appliances. Volkswagen AG builds cars in Slovakia but imports steel from
Germany because VSZ can't supply it.

'We Need More Colors'

The work force, though huge at 17,000, was generally well-educated and
dedicated. Workers had planted trees all around the factory. "We need more
colors here than just gray," says mill manager Jozef Gzajcar.

Messrs. Connelly and Goodish flew to Slovakia in 1997 and decided to test
the waters by setting up a small tin mill line, which combines steel and
tin in one line for things like tin cans. Slovakia, desperate for foreign
investors, was more than eager to do business.

"The more American investment, the higher the interest of other American
businesses," says Prime Minister Dzurinda in an interview. The steel
industry was especially critical since it accounted for nearly 10% of gross
domestic product.

Luckily for U.S. Steel, shortly after Mr. Connelly and Mr. Goodish arrived,
so did Gabriel Eichler, chief international economist for Bank of America,
which is one of dozens of creditors for the nearly bankrupt VSZ. Mr.
Eichler, who specializes in sorting through the finances of troubled
companies, had no steel experience. But he was born in Slovakia, leaving
the country when he was a young boy. The creditors thought he could ease
the process of either selling VSZ or making it profitable once more, and he
wound up running the company for a couple of years.

When he arrived, he found that records were spotty and VSZ's steel assets
were stashed in about 100 holding companies, most of which were shell
companies established for the sole purpose of kicking money back to
management, he says. It was nearly impossible to know what VSZ owned or
owed. The steelmaker wasn't interested in working with customers to develop
new products or meet special needs.

"The company was zero value to customers," Mr. Eichler says.

Six Bodyguards

After months of work, he tallied up $440 million in debt. He shut down the
illegally set-up companies, which made him the object of death threats. Six
bodyguards were assigned to him, and he rode in a bulletproof car.

Once he heard that U.S. Steel might be interested in buying VSZ, Mr.
Eichler began to shop it around, hoping he could get bidders to play off
each other and raise the price. At the annual world steel meeting in the
summer of 1999 in Mexico City, he approached several executives who said
they weren't interested in even discussing the possibility. VSZ had a
reputation throughout the steel world for corruption, not steel. "Nobody
else was interested except U.S. Steel," he says.

Mr. Wilhelm wasn't troubled by the idea that most of the industry thought
VSZ was a dog. "That wasn't material to me," he says. "This makes sense for
U.S. Steel." The American company already had a working relationship with
VSZ, wanted to expand beyond unprofitable U.S. shores and had the cash to
buy growth.

Negotiations were slow, in part because U.S. Steel made some blunders. One
was playing negotiating games. U.S. Steel floated its first price, fully
intending to offer more. But VSZ officials, unused to the American style of
negotiating in which both sides haggle, thought the offer was firm. VSZ was
insulted at the low price and immediately broke off negotiations. It took a
few months to get the two sides talking again.

"They kept screwing around for 11/2 years," says Mr. Eichler. "I joked with
them that in five years, we'd go after U.S. Steel."

"Have we made mistakes? Yes," says Mr. Goodish, who will move here with his
family from Pittsburgh. He had earned a reputation for running U.S. Steel's
massive mill in Gary, Ind., with a lean work force and for keeping
customers happy with on-time deliveries. Later he became president of U.S.
Steel's engineering and consulting unit.

Turning a Profit

U.S. Steel will pay between $425 million and $475 million for VSZ's steel
assets including the assumption of bank debt totaling $325 million. And the
prolonged negotiations brought one benefit: They gave Mr. Eichler time to
clean up the balance sheet and get the company to turn a profit, which it
did in the second quarter of this year.

But U.S. Steel buckled to pressure from Slovakia to protect VSZ's existing
17,000 workers. GaryWorks, U.S. Steel's largest plant, has only 7,400
employees and it produces about half of the company's steel and more than
VSZ. "We are overemployed somewhat," says VSZ's longtime managing director,
Anton Jura. Mr. Jura defends the overabundance of steelworkers with an
indictment of America's profits-first, people-second style of management.
"There is no way to bring the American business culture here," he says with
a dismissive wave of his hand. "We already have had too many changes in a
short period."

Indeed, some existing Slovak managers have complained loudly about being
treated as second-class executives. "We built this company," says Pavol
Nemcousky, who has spent 34 years at VSZ. "This place should be managed and
controlled with people from Slovakia."

Still, even with Slovakia's low wages and low production costs, keeping so
many on the payroll would eat into profits and make competition with lean
West European steelmakers for high-end products nearly impossible. Mr.
Goodish is counting on attrition and retirements to help trim the work force.

Offering Lower Prices

Breaking into new markets is going to be difficult as well. In the clubby
world of steelmaking, a longtime relationship between supplier and consumer
is often the most important factor in making deals. Big car makers and the
other steel buyers in that part of the world already have long-term
contracts with other big steel makers, such as ThyssenKrupp. Mr. Goodish
says that U.S. Steel will offer the lowest price to customers. But its
European steel rivals may lower their prices to thwart the new competition.

U.S. Steel sees Slovakia as a long-term investment. It plans to spend $700
million over the next 10 years to install high-end lines that will make
about 330,000 tons a year of auto-quality steel, which it hopes to sell to
Volkswagen, Ford Motor Co. and General Motors Corp. It plans to sell steel
in a 375-mile radius, which includes Poland, Hungary, Ukraine and the Czech
Republic.


Louis Proyect
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