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NYT
October 26, 2005
Got an Ailing Business? He Wants to Make It Right
By CLAUDIA H. DEUTSCH

Lots of people call Wilbur L. Ross Jr. a vulture investor. He finds that ridiculous. If one must liken him to a bird, he says, then make it the phoenix, the mythical creature that repeatedly rises from its own ashes.

"Vultures pick off the flesh and leave the carcass to rot," he said, during a conversation in the Manhattan offices of W. L. Ross & Company, his investment firm. "We help dying companies survive and grow."

Maybe so. But can he do that for Collins & Aikman, the bankrupt auto parts supplier, or for the many other parts suppliers - possibly including Delphi, which recently sought bankruptcy protection - that he acknowledges are on his radar screen?

Clearly, he thinks he can. This month, W. L. Ross and the Lear Corporation announced a joint venture to buy ailing auto parts companies, and combine them into a global auto parts powerhouse. Mr. Ross said his company would own a majority of the venture. Lear, which is contributing its business of car interiors, with about $3.5 billion in annual sales, and other investors would own the rest.

The yet-to-be-named company plans to buy Collins & Aikman, and is looking at some operations that Visteon, an ailing parts supplier, transferred to its former parent, the Ford Motor Company. "There's no reason why we can't be a $10 billion or even a $15 billion player," Mr. Ross said. His track record is certainly good. Starting in 2002, Mr. Ross began rolling the remains of five bankrupt steel companies into the International Steel Group, which he sold to Mittal Steel in April for $4.5 billion, about a tenfold profit, he said.

In 2003, he began turning the remnants of Burlington Industries and some other textile companies into the profitable International Textile Group. And last year he began turning ailing coal assets into the International Coal Group, which he is in the process of taking public.
"I'd never bet against Wilbur Ross," said Robert S. Miller, who was heading Bethlehem Steel when Mr. Ross bought it and now heads Delphi.

Mr. Ross's game plan for his nascent auto parts conglomerate, he said, is to take it public quickly. And even investors who have steered clear of automotive supply stocks say they are looking forward to it.

"The company he envisions is small enough to avoid antitrust issues, but big enough to be a real player," said Timothy M. Ghriskey, chief investment officer of Solaris Asset Management. "I'd buy stock in that kind of company."

Still, Mr. Ross is buying into a $75 billion global car interiors industry that is operating at about 65 percent of capacity, that has huge pension and health care costs and that has been rife with bankruptcies and earnings disappointments.

By the time Mr. Ross began buying steel companies, their previous owners had transferred their pension liabilities to a Pension Benefit Guaranty Corporation that was then robust. But the auto parts industry has not resolved its pension obligations.

Moreover, ever since the guaranty corporation took on Bethlehem Steel's pension liabilities, it has struggled with its own record deficits, and may be less inclined to assume the pension problems of the auto parts makers.

Mr. Ross, who assumed Burlington's underfunded pension plan, says he expects the guaranty corporation to accept more pension plans. Even if it does not, he says, he will buy only companies whose pension liabilities can be offset by cost cuts elsewhere.
"Unlike health care, with pensions you know what your costs will be, so you just do the arithmetic," he said.

Other drags on earnings are harder to calculate. Automakers have put great pressure on their suppliers to cut prices, even as the suppliers face ever rising costs for labor and petrochemical raw materials.

Nor is increasing demand from Asia likely to bolster prices. South Korea, China and other Asian countries have local parts companies serving their automotive industries.
"What investor wants to buy a company that sells plastics to G.M. when plastics are going through the roof while the prices G.M. pays go down?" asked Robert D. Barry, an analyst at Goldman Sachs who recommends that investors be cautious about all auto parts suppliers.
The answer, of course, is Wilbur Ross. Mr. Ross concedes that "the industry model is broken," but says he can fix it. Some of his plans are obvious: buy flailing companies at rock-bottom prices; eliminate duplicate staffing and inefficient plants; and negotiate better labor contracts.
But some are less intuitive. He plans to pump a lot of money into product research, for example. "This industry should be overspending on R & D, but the companies responded to the pricing pressures by cutting back on it instead," he said. Mr. Ross said he was particularly interested in safety systems, and in new uses for nanotechnology, the science of manipulating very small particles.

W. L. Ross recently teamed with Masters Capital, a hedge fund, to buy up nanotech companies. "A lot of technologies don't exist here yet," he said. "But they will."
Mr. Ross is also certain that a huge company has a better chance of locking in its prices for raw materials, and of exerting influence with its automotive customers.
Even though parts for car interiors are a commodity in the sense that many suppliers can bid for the business, winning bidders do have some sway over customers. The tools and processes they use cannot be quickly replicated by their rivals.

Moreover, the parts themselves are bulky, which makes it uneconomical for automakers to buy parts that must be shipped long distances. Indeed, automakers have lent Collins, for one, millions of dollars - money they are unlikely to get back - to keep parts flowing to their factories.
"Automakers who pushed their original supplier over the brink will be more likely to give concessions to a new company," Mr. Barry of Goldman Sachs said.
That may also be true of unions. Mr. Ross negotiated flexible work rules and productivity-linked pay at the steel companies, but he preserved jobs and many benefits.
"He's tough, but he brings as much credibility and integrity to the bargaining table as anyone I've dealt with in the last three decades," said David McCall, District 1 director of the United Steelworkers of America, who negotiated most of the International Steel Group contracts.
Mr. Miller of Delphi said Mr. Ross honored severance promises made to executives at Bethlehem. "He is a brilliant negotiator who does his homework and recognizes those points on which the other party cannot give ground," Mr. Miller said.
Mr. Ross is counting on labor's help. He noted that the health care concessions that the United Automobile Workers granted to G.M. are highly unusual outside a bankruptcy. Although Mr. Ross signed the Lear deal before the G.M. agreement became public, "We were betting that it would happen, and that the unions will offer similar concessions to the parts makers."
He is also betting that the union's flexibility on health care will extend to negotiations about pensions. "Historically, health care has been the most sensitive issue," he said.
The recently enacted bankruptcy law may also help Mr. Ross's prospects, in that it makes it harder for bankrupt companies to pay huge bonuses to executives. "The incentive for executives to hide out in bankruptcy is gone," he said, "and that will hasten their decisions to sell."
For now, Mr. Ross is not going after Delphi, although he readily conceded that "parts of Delphi are certainly interesting."
Mr. Miller said that on July 1, the day he joined Delphi, Mr. Ross called to express interest in investing in auto parts. "I told him it was premature to talk," Mr. Miller said. But he said he would welcome calls when Delphi was in better shape.
"Wilbur likes to invest in industries that are out of favor, and auto parts are certainly in that category," he said. "But he wants assets that have gone through bankruptcy, had the barnacles stripped off and the liabilities resolved."