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Bain Capital and the Little Steel Mill That Could
Romney’s firm is behind one of American steel's few recent success stories.

Molten pig iron is injected into a furnace at a Steel Dynamics plant in Butler, Ind.

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Since the 1960s, only one American corporation has independently begun to produce steel on a large scale, and Bain Capital deserves a good deal of the credit for its success. In the spirit of globalization and creative destruction, private-equity firms are supposedly drivers of off-shoring and outsourcing, accelerating the decline of key American industries. Though it’s impossible to say what effect Mitt Romney’s work at Bain Capital has had on American industry overall, he can point to at least one success story in an ailing American industry: Steel Dynamics.

Bain’s investment in another steel firm, GS Technologies, was the impetus for a Reuters story repeatedly cited as an example of the worst kind of private-equity investment — loading a company down with huge debt, extracting dividends for the investors, and charging for consulting services. But Bain’s more successful involvement in Steel Dynamics, an Indiana-based company, has not received nearly as much attention (though the Romney campaign has cited it as a counter-example). From its founding in 1994, Steel Dynamics (SDI) has grown to be America’s fifth-largest producer of carbon-steel products, one of just six major U.S.-owned steel companies.

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Keith Busse, now chairman of SDI, made his reputation in the 1980s as an executive at Nucor, one of the largest steel firms in the U.S., pioneering a new type of steel mill, “mini-mills,” which use electric-arc furnaces instead of blast furnaces, an innovation that giants such as Bethlehem Steel had not embraced. After he was passed over for promotion in 1993, he and two of his colleagues began discussing the possibility of striking out on their own. They saw potential in mini-mill technology, which had typically been used for applications such as automobile manufacturing, as a way to produce higher-grade steel at a much lower cost.

There were significant obstacles: The steel industry is highly capital-intensive, the American steel industry was hardly a hot startup market, and the venture would be staggeringly expensive — well beyond their own means, and those of most investors. According to a 1996 interview with Busse in the Fort Wayne Journal Gazette, early meetings with traditional investment bankers were unsuccessful; there was little interest in supporting a new, independent steel venture with the hundreds of millions of dollars that would be needed before any mills would even become operational. But Busse persevered and eventually found two firms willing to provide the millions in initial funding: GE Capital and Bain Capital.

Brad Seaman, who worked for GE Capital on the deal, explained the role of these two firms in an interview with National Review Online. Two strategic investors were already committed to providing half of the startup funding, but GE could only provide another quarter. Seaman suggested the deal to Bain, which agreed to supply the other quarter of the financing needed, putting up $18.2 million. But the approximately $80 million in initial investments was just the seed financing, and more than $600 million would be necessary before SDI began production, with no guarantee of success. Compare this with, say, a technology company, which might begin business with a round of angel financing of well under $1 million and a much easier path to getting a product to market.

As Seaman explains, the involvement of the two financial firms “really did two things that were necessary.” The commitments by two respected firms provided confidence to the type of investors who had earlier shied away from the project, and, more important, Bain and GE Capital “got some really smart investors in with the necessary experience to make the project happen.” Seaman gives an exceptional amount of credit to the three steel executives who made the jump from Nucor, noting his “enormous respect” for their industrial expertise. But expertise alone does not make a steel mill, he says. “What we added was to get the company funded,” he says. “Without that, it couldn’t have happened.”

In the early 1990s, a particularly difficult time in the financial markets, Bain and GE managed to raise the hundreds of millions of dollars necessary for the project. After the recent financial crisis, it is tempting for liberals and conservatives alike to deride the work of financiers as simple, or even perverse, “financial engineering” — a legitimate criticism at times. But in this case, an enormous industrial project would not have been able to find financing and hire American workers without the blend of investment-banking and management-consulting expertise Bain brought to the table. Seaman explains, “The folks from Bain did an outstanding job. The company wouldn’t have gotten off the ground if they hadn’t been there.”

Just 19 months after the initial funding was raised, in January 1996, SDI began production. Seven months later, it managed to turn a profit, and the company held an initial public offering in November of that year. Bain held on to all of its shares as the company continued to grow, using the capital raised to open two new mills of different types in 1997 and 1998.

In 1999, Bain Capital sold its stake in SDI for $104 million, generating an internal rate of return for investors of 55.4 percent (my calculation, without dividends and consulting fees). Since then, SDI has continued to grow, and it generated $6.3 billion in revenue in 2011 while employing more than 6,000 American workers. Sadly, many U.S. steel producers have continued to move abroad or go bankrupt, as Seaman noted, “precisely in the order they fall along the cost curve,” unable to beat foreign producers’ prices. But SDI’s technology has provided a way for American steel producers to compete. The success of SDI has even helped fuel a virtuous cycle — a true job creator, Busse has used some of his wealth to endow a range of engineering professorships and entrepreneurial-studies centers at Indiana universities.

It is impossible to determine exactly the overall effect private equity has on American workers and domestic industry (though studies have tried). But Steel Dynamics offers a particularly positive case; its courageous origins and clever management have allowed it to compete with foreign manufacturers in what most considered an industry for which the die had been cast and America had lost. For every tragic story of a company that  fails at the expense of its workers and investors, there are stupendous successes such as that of Steel Dynamics, and they would not happen without the capital and expertise of firms such as Bain. 

— Patrick Brennan is the 2011 William F. Buckley Fellow at National Review.



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