Paulson Bets Reputation on Wheeling : Rift Healed, He Fights to Keep His String of Successes Unbroken

By last September, a situation that had been difficult turned desperate.

Staggered by three years of losses, Wheeling-Pittsburgh Steel was in bankruptcy reorganization. Its creditors were in an uproar, and its workers, on strike since mid-July, were burning effigies of Dennis J. Carney, the proud and combative chairman of the seventh-largest U.S. steelmaker.

Liquidation would have been next, but for a surprise maneuver by the company’s largest shareholder. On the morning of Sept. 18, Allen E. Paulson wrote three personal checks for $2.3 million in severance pay for Carney and two of his lieutenants.

The move bought their resignations, appeased the union and cleared the way for settlement of the strike.

“Until that moment Paulson had really been a mystery man, off in the shadows,” says Paul D. Rusen, who was chief negotiator for the United Steelworkers Union. “Then suddenly he gets up and he’s the key player in the game. It was pretty dramatic.”

Board Room Battles

It was not the only dramatic moment in the troubled recent history of Wheeling-Pittsburgh, or in the career of soft-spoken, farm-bred Paulson, who made himself nearly half a billion dollars with Gulfstream Aerospace, the second-largest maker of corporate jets.

Wheeling-Pittsburgh’s bankruptcy reorganization is the largest ever in the domestic steel industry, and the turmoil accompanying it produced one of the most remarkable board room battles.

Although the company has never had more than 3% of the domestic steel business, its struggles have broad implications.

Some expect that Wheeling-Pittsburgh’s Oct. 25 labor settlement will set a pattern for wage concessions when industrywide contract talks begin in early 1986. The agreement cut the company’s labor costs, including wages and benefits, 16% to $18 an hour.

If Wheeling-Pittsburgh emerges successfully from reorganization, its leaner cost structure will set a precedent for other domestic producers.

Not least important, Wheeling-Pittsburgh’s travail has brought crisis to a federal agency that was set up to provide last-resort pension programs for employees of threatened companies.

The steel company’s decision to withdraw from the federal program in favor of a less expensive one is likely to saddle the agency with $475 million in pension obligations, and may threaten its ability to provide pensions for retirees from other companies.

For 63-year-old Paulson, the company’s fate has a quite separate meaning. He has watched a 34% stake that he purchased for $50.5 million dwindle to a current market value of about $13 million. If Wheeling-Pittsburgh fails, it will mean not only financial loss, but also a blight on his record of guiding businesses to success.

“It’s a matter of pride,” he said in an interview that was his first detailed public discussion of the matter. “They’ve got to make it.”

The steel company has been peering into the abyss for some time. Cobbled together in 1968 as a merger of between Wheeling Steel Corp. and Pittsburgh Steel Corp., the company operates 11 mills that stretch along the foot of Alleghany river valleys in western Pennsylvania, West Virginia and Ohio.

In 1978, leadership of the company fell to Carney, a Massachusetts Institute of Technology-trained metallurgist who prided himself on his knowledge of the steel business, and had gained a reputation for a confrontational manner. He bent his best effort to scraping together enough capital to fill Wheeling-Pittsburgh’s aging steel and brick buildings with the latest in steelmaking equipment.

Many say he did a masterful job, including the steelworkers who became his bitterest foes. “There’s no question we wouldn’t be here today if Dennis hadn’t done what he did,” the steelworkers’ Rusen said. “The guy had a genius for keeping the place going.”

Twice he persuaded the steelworkers to give ground on labor contracts. Such was his creativity that Carney arranged a federal loan guarantee to cover part of the financing of a $120-million rail mill at Monessen, Pa.--outraging competitors and prompting one U.S. senator, Connecticut Republican Lowell Weicker, to call for a federal investigation of the guarantee.

As well as securing hundreds of millions in bank loans in the late 1970s and early 1980s, Carney was an effective promoter of the company’s stock, arguing that a leaner, higher-tech Wheeling-Pittsburgh could earn booming profits in an economic recovery. Those who invested included such financial sophisticates as Lawrence A. Tisch, chairman of Loews Corp., and Carl Lindner, chairman of the American Financial Corp.

Another was Paulson, who had made more than $85 million when Gulfstream Aerospace went public in 1983, and was looking for a way to diversify. He began purchasing Wheeling stock in 1983, and by last year had become the company’s largest shareholder.

In 1984, he and Nisshin Steel, Japan’s sixth-largest steelmaker, each purchased $17.5-million worth of Wheeling-Pittsburgh stock at $35 a share--an $8 premium over the market price--to help the company’s money-raising effort, Paulson recalls. Nisshin wanted to enter the huge U.S. market and was eager to help in Wheeling-Pittsburgh’s rehabilitation.

Under Carney’s leadership Wheeling-Pittsburgh spent $700 million to modernize. Yet the turnaround never came off.

As steel imports flooded the market and depressed prices, the company failed to scramble up the slipperly slope into profitability. Since 1982, Wheeling-Pittsburgh has reported profits in only two quarters, and its losses have totaled more than $250 million.

The company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code last April. The immediate cause was the steelworkers’ refusal to agree to a debt restructuring that would have given 11 creditor banks a claim on Wheeling-Pittsburgh’s $300-million in current assets.

On July 21, the steelworkers went on strike to protest the company’s decision to abrogate its old labor contract and impose a new one that dropped labor costs to $15.10 an hour from $21.40.

The mills shut their doors, and tempers rose throughout the summer. Bumper stickers on union cars demanded “Carney must go!”

Steelworkers stopped drinking Iron City Beer to put pressure on Robert E. Seymour, president of Pittsburgh Brewing, who had been chosen by Carney to sit on the Wheeling-Pittsburgh board. Iron City sales fell 9%, and Seymour quit the board Sept. 20.

His wasn’t the only departure. In April, Pittsburgh attorney Peter Denby quit the board, saying he faced a conflict of interest, since his firm also represented a Wheeling-Pittsburgh creditor. Robert A. dePalma, chief financial officer of Rockwell International, resigned in August, saying other duties kept him from giving the directorship sufficient attention.

As losses mounted, so did tension in the corporate board room.

Relations between Carney and Paulson had already been strained in 1984 by Carney’s desire to sell more stock. “He could have gotten so little for the stock at that point that I was sure all he really wanted to do was reduce my stake,” Paulson says.

Paulson and Nisshin Steel’s representative on the board, Nisshin President Yuzuru Abe, also found Carney unwilling to consider their suggestions on running the business--though between them they represented 44% of company stock.

“He tried to shut me up with, ‘What do you know about the steel business?’ ” Paulson recalls. On another occasion, Carney asked, “Who ever heard of a company being run for its stockholders?”

Carney did not return several phone calls to his Pittsburgh home. One of his appointees to the board, former director Henry G. Allyn Jr., acknowledges that Carney was “rude” in his treatment of Paulson and Abe.

“I was amazed at Paulson’s patience through it all,” says Allyn, who is the retired president of Pittsburgh & Lake Erie Railroad Co.

Said another who was present at the meetings: “You’ll have to look way back in American corporate history to find a case of a CEO roughing up major shareholders like that. I can’t believe Paulson stood for it.”

Carney was also unwilling to share information about the company’s situation, Paulson says. “If you wanted to find anything out, you damn near had to read it in the paper,” he said.

Abe was intent on avoiding confrontation, but it became clear that Nisshin’s frustration was growing. On Aug. 28, Abe resigned from the board without offering a public explanation.

“We did not come here to give money and technical knowledge but contribute nothing else,” said Kiichi Mochizuki, president of the steel company’s U.S. subsidiary, Nisshin Inc., who acted as translator for Abe at board meetings.

Mochizuki won’t discuss Nisshin officials’ deliberations on the crisis, but hints that he may have pushed to have Nisshin put more pressure on Carney.

“I was caught in a valley between two cultures,” he said. “In America, a shareholder’s rights are a shareholder’s rights, and something you fight for. In Japan, they try to solve problems a little differently.”

As the company’s inventories declined and customers drifted away, Mochizuki discussed Wheeling-Pittsburgh’s situation with Paulson and approached union officials, according to the steelworkers’ Rusen. He did so even though George Raynovich Jr., Wheeling-Pittsburgh’s general counsel, warned board members not to have any conversations with steelworkers, according to Rusen.

“There was always danger that Kiichi could have gotten into legal trouble talking to us,” he says.

Carney apparently caught wind of the conversations, for he fired off a telegram denouncing Nisshin for meddling in an internal American business matter, Rusen says. The telegram had the desired effect on Nisshin officials in Tokyo, who feared any fuss that might further endanger relations between U.S. and Japanese industry, union officials say.

“They pulled Kiichi right back,” Rusen says.

Assessed Situation

By the fall, Paulson had become convinced that no strike settlement could be reached while Carney remained chief executive. He believed that he could win a proxy fight, but that could take several months, during which time the company’s remaining assets would be wasted.

And, he says, “it would have just torn the company apart even more than it already had been.”

Instead, he wrote wrote checks of $1.5 million for Carney, and two checks of $400,000 each for Raynovich and Joseph Scalise Jr., the vice president of labor relations.

He was forced to provide the severance pay from his own pocket because of Carney’s fear that the bankruptcy court would void any company commitment.

“Carney was afraid the union would have gone to court to challenge any company deal,” says David Supino, of Lazard Freres & Co., a New York investment banking house, which advised the union. “He was right--that’s exactly what we would have done.”

Carney had a last word. In a statement, he said it was “unfortunate that the union and its leaders have elected to cause extensive damage to the company by ignoring the U.S. marketplace . . . and the fact that the company is bankrupt.”

Not all the players believe that Paulson made the right move. Former director Allyn says he isn’t yet convinced that the company can turn a profit with a labor cost of $18 an hour.

A bank source feels the same way. “We wouldn’t have put up that money,” the source said.

Mochizuki sees it differently. “Everybody should be grateful to him--shareholders, employees, and customers.”

Paulson’s first step after Carney’s departure was to meet with Rusen and other union officials to press for a labor settlement. “He looked us in the eye and said, ‘OK, I’ve put up $2 million to make good on my side; what are you going to do to make good on yours?’ ” Rusen recalls.

The steelworkers acknowledge their gratitude at Carney’s ouster, and at Paulson’s decision to put George A. Ferris, a 69-year-old former Ford Motor vice president, in his spot. Ferris immediately told the steelworkers they would have a say in all major decisions, and pushed to put a union member on the board.

Paulson, who has never had union representation at Gulfstream Aerospace or his other businesses, “choked a little bit, but agreed,” Rusen says.

To demonstrate his good-will, Ferris also declared blanket amnesty for Wheeling-Pittsburgh workers facing disciplinary charges. This move surprised even union officials, since it meant that the company would not fire four steelworkers who had been caught driving out of a Wheeling-Pittsburgh mill with a pickup truck full of company steel.

The steel company’s ills are more serious than anything Paulson had confronted earlier in his business career, yet he has struggled with unprofitable operations.

Started as Mechanic

One of six sons of an Iowa farmer who went bankrupt in the Depression, Paulson became a Trans World Airlines mechanic at age 19 for 30 cents an hour. After World War II, he made money on an airplane engine valve he invented, and in 1951, he launched his own business modifying engines and selling spare parts.

Gulfstream Aerospace was formed primarily by two acquisitions--the 1978 purchase of Grumman’s general aviation division for $52 million, and the 1981 purchase of Rockwell International’s general aviation division for $25 million. The Grumman division made the highly regarded Gulfstream corporate jets, but was not profitable.

Paulson made the operation profitable. Gulfstream’s revenues grew to $602 million last year from $196 million in 1978, and its initial public offering was one of the largest ever, raising $167 million. Although Gulfstream’s profitability fell off in 1984, Paulson last August sold the company for $637 million to Chrysler, which said it hoped to apply Gulfstream’s aerospace technologies to its auto business.

Paulson, who remains chairman and chief executive of Gulfstream, received about $450 million in the sale. He had decided to sell not because of Wheeling-Pittsburgh’s troubles, he says, but because he wanted to make his fortune more accessible to his heirs in the event of his death.

The idea of a sale to Chrysler came up during a chat at his Palm Springs home with Chrysler Chairman Lee Iacocca, who he counts among his friends. “I asked his advice, and one thing led to another.”

In the last two years, Paulson has made another name for himself as one of the biggest-spending thoroughbred horse buyers in the United States. He has spent more than $80 million on more than 300 horses, says Bruce McNall, who is chairman of Summa Stables in Beverly Hills, and a Paulson partner in some thoroughbred deals.

In addition, Paulson owns oil wells, ranches in San Diego County, Kentucky and Georgia, and one floor of Wilshire House, a plush condominium high-rise on Wilshire Boulevard in West Hollywood. He has decorated the Wilshire House condominium with Greek and Roman sculpture, vases and other art objects, in a collection worth “millions--maybe jillions,” says McNall, who advised Paulson on the project.

Paulson, who has been divorced twice and has three sons, is proud that he amassed a fortune from humble beginnings. “I’m strictly a by-the-bootstraps guy,” he says.

He seems annoyed by a recent news story that estimated his net worth at $250 million. The correct figure is close to $450 million, he says, “and that’s conservatively.”

Paulson may know soon whether his Wheeling-Pittsburgh stake has any value.

Since the strike ended, the company has won back business from some old customers, including General Motors and General Electric. It has also gained some new ones, and there has been speculation that Paulson’s ties with Chrysler may bring orders from that company.

Seeks New Loans

Wheeling-Pittsburgh is negotiating for up to $80 million in fresh bank loans that it will need by the first quarter of 1985 to continue operations.

Yet the bank creditors, who are owed about $120 million, say they may press for liquidation if there are not signs within the next few weeks that recovery is likely. They have insisted that Wheeling-Pittsburgh shut down most operations at its Monessen mill, a step that would involve layoffs of up to 1,400 workers.

The company is due to make that decision Dec. 15. “We wish Paulson well in his effort, but how much longer can we let the bleeding continue?” a bank source asks.

For his part, Paulson insists what will happen next “may surprise a lot of people.”