With friends like these … - Editor's Focus

Recycling Today, Oct, 2002 by Brian Taylor

Executives in the basic materials industry have often decried the difficulty of attracting investment capital in recent years. Certainly, during the dotcom/fiber-optic/telecom boom of the late 1990s, metals and paper industry executives looked on with a combination of bewilderment and jealousy as dollars were thrown headlong into high-tech companies vowing to provide staggering returns on investment based on the flimsiest of premises.

Unfortunately, while Wall Street money managers were ignoring the basic materials companies, some of the investors who did buy in may not have been investing in metals and paper plants with the best of intentions.

Recently, American Metal Market profiled one individual investor who is portrayed by his detractors as buying metals production facilities, then squeezing out material while neglecting capital improvements to keep the plants viable on a long-term basis.

As a distant observer, I do not know whether that was in fact the modus operandi of this individual. The short-term investment practice he is accused of, though, has become a common one.

Increasingly, shell investment companies have been buying plants and offering an encouraging sign to workers and the communities involved by ramping up production at the facilities they acquire. What often follows, though, are shoe-string maintenance and capital improvements budgets as plants are run into the ground and revenues skimmed off the top by the shell company shareholders, who grant themselves impressive salaries, bonuses and perks.

After a few years, the shell company declares bankruptcy, workers are laid off, suppliers and other creditors are left holding the bag, and the shell investors (often under a limited liability umbrella) walk away with their bank accounts full from the previous few years of operations.

The net effects of these types of operations are almost entirely negative for all but the handful of hidden investors. Workers, who may have endured unsafe conditions in a rundown plant anyway, are now jobless. The community loses jobs and often is left with an environmental cleanup task brought on by shell investor negligence. Creditors and industry suppliers have been burned. Competitive metals or paper, firms are left to recover from competing against a low-cost producer. And news of another bankruptcy in the basic materials segment gives another lending and investing black eye to the industry.

These last three effects throw a one-two punch at well-managed companies struggling to keep the American basic industries segment competitive against cost-efficient overseas operators. The good news is that there are many well-managed companies processing and consuming scrap metal and paper. The bad news is the managers of these companies must sometimes feel the deck is stacked against them.

Supporters of the current personal and corporate bankruptcy laws in America note that any reforms must not act as a disincentive to risk takers. But the question must also be asked whether the system as is allows for those with less noble intentions to get away with a little more than they should.

As global competition grows increasingly fierce, American industry needs all the capital investment that can be mustered. The one exception to that open invitation, however, might go out to the wolves in sheep's clothing.