Junkyard Capitalism

Bankruptcy has been very good to Wilbur Ross, Jr. Over the past few years, by snatching the distressed assets of LTV, Acme Steel Corporation, and Bethlehem Steel out of bankruptcy, he has erected the second-largest integrated steel producer in North America.

The result is International SteelGroup (NYSE: ISG  ) , which came public on Friday. The stock surged 26% to $35.20, as the company raised $462 million with Goldman Sachs (NYSE: GS  ) as lead underwriter.

The U.S. is unique in that its bankruptcy laws are not particularly punitive. Wilbur exploited this to the fullest in route to slashing a bloated cost structure with ISG. He avoided significant pension liabilities, negotiated a new collective bargaining agreement, and collapsed the number of job classifications from more than 30 to five. A transition away from fixed costs in favor of variable should help the company deal more effectively with the inevitable slumps in demand.

ISG has a stellar management team that understands the dynamics that essentially destroyed most of the great U.S. steel companies. Rodney Mott, the CEO, worked at Nucor (NYSE: NUE  ) for 13 years and U.S. Steel (NYSE: X  ) for 14 years. At ISG, he's instituted profit sharing, decentralized management (only 45 employees work out of the corporate headquarters), and increased training. In the prospectus, the word "culture" appears 15 times.

There are certainly risks. President Bush ended the import tariffs and quotas that protected U.S. steel makers. The global competitive environment is still intense. On the other hand, we have a stronger U.S. economy and weaker dollar making exports more attractive.

So far, ISG seems to have found the formula to alchemy, turning steel into profits.

Tom Taulli is the author of six books on investing and finance, such as the Complete M&A Handbook (Random House). He is also a professor of finance at the USC School of Business (don't worry, he does come out of his ivory tower). You can reach him at tom@taulli.com.