AN ANALYSIS: A Strong Current of Change

Bill Wolpin

The language you could use to describe the event is simple: the pooling of capital and resources, trucks, landfills, transfer stations and talent.

But if the merger is completed between these two industry titans - Oak Brook-Ill.-based Waste Management and USA Waste, Houston - its effect will be anything but simple.

Consider the combined company's size: 650 collection operations, 319 landfills, 339 transfer stations and 76,500 employees. All this adds up to a 1997 revenue of $11.8 billion ($9.2 billion for Waste Management and $2.6 billion for USA Waste).

At first glance, the reasons for the merger appear simple, as well. For example, pooling the resources of both companies will save money - "at least $800 million through operating synergies and enhanced efficiencies," notes the mid-March announcement issued from both companies.

USA Waste's strong leadership provides another important reason: The one element the floundering Waste Management needs, ironically, is management.

And, at least one other possible reason for the merger surfaces when you dive deeper into the numbers: The companies' operations complement each other.

Compared to USA Waste, for example, Waste Management had far more collection operations (400 versus 250), but fewer company-owned transfer options (164 transfer stations versus 175 owned by USA Waste) and still fewer landfills (137 versus 182).

Clearly, the new Waste Management is being led primarily by top USA Waste personnel (see "At the Helm" on page 18), although, according to the announcement, the members of its new senior management team will be chosen "from the best of both companies."

However, both companies most likely will be releasing some future competitors. "I won't be surprised if several former employees of Waste or USA start their own company," says N.C. Vasuki, head of the Delaware Solid Waste Authority in Dover.

Peter Ruud, vice president - administration at Madison, Wis.-based Superior Services, agrees. "It's happened before, and it's reasonable to assume that will happen again, based on the way our business has developed historically."

Ruud also sees opportunities for his company, and those like Superior, to purchase some of the assets likely being sold by Waste Management.

In addition, he says, "there will be some management talent available," all the way down to the local level.

Who Will Be Affected? How this merger will affect the industry depends on who you talk to. For example, Ruud views the merger as a positive sign. "For the past couple of years, the industry has been operating under a cloud because its largest company has had some very serious questions raised about its ability to manage its operations."

He says WMI's problems were viewed as "a reflection of problems in the industry as a whole," particularly in the investment community.

"Putting the USA management to work over the Waste Management assets will remove a great deal of those concerns." As a result, he says, the publicly-held companies will benefit because investors will view environmental stocks more favorably.

Ruud also predicts that the merger will add stability to the nature of competition. He says in some cases, "local [Waste Management] operation's activities were somewhat unpredictable." He expects "more rational pricing and a more disciplined approach to producing earning" under the new leadership.

Bruce Parker, president and CEO of the Environmental Industry Associations (EIA), Washington, D.C., sees the merger positively. "There are clearly opportunities with this change," he says. "It depends on how you manage it."

In a unique position to feel the affects of this merger, the EIA will lose at least one large dues-paying member as a result of the consolidation. Parker maintains that the association's value can increase with a company's size, however.

Although he knows that USA is a "lean and mean" company, Parker sees opportunities for the association in providing services to large companies, such as the new Waste Management, that they don't want to invest in themselves.

In fact, he sees the development of the larger integrated waste management companies as a necessary part of the industry's and EIA's growth.

"To some degree, the future stability of the industry is in the larger companies, both publicly-traded and independents, that have the financial means, resources and needs to use a trade association to its fullest."

Parker sees opportunities for the smaller operator, especially in the niche area. "What difference does it make if you have a 100-pound or an 80-pound gorilla to compete against?" he says. "Garbage truly is a local service, and the ability to act quickly and make changes has been the element that enables small haulers to persevere."

Dave Gobin, vice-president and chief development officer at Casella Waste Systems, Rutland, Vt., agrees that the consolidation presents an opportunity for small haulers "because they respond quicker to customers." He also believes that Waste Management's sophistication and resources will balance the equation.

"It's waking a sleeping giant," he says. He thinks that in some cases, independents may have become complacent because "Waste Management wasn't as competitive as they were capable of being," he says.

"The level of competition will be raised," he predicts, because USA's marketing savvy is more advanced than that of the old Waste Management.

Ultimately, Gobin sees independents finding their niches, as well. "They have to reinvent themselves - an introspection to find out how they will compete against a larger entity with better tactics and management," he says.

Municipal Vibrations "This is not a consolidation of two companies," says John Skinner, Executive Director of the Solid Waste Association of North America, Silver Spring, Md. "It's probably a consolidation of seven or eight."

As a result, Skinner sees "one company dominating in some regional markets." The twin goals of consolidation and vertical integration shared by larger private contractors "will lead to a significant reduction of competition in the industry," he says.

This consolidation serves as a reminder to municipalities of the importance of writing a good contract, Skinner says, especially when that company may be bought during the contract period.

"It becomes extremely important with respect to post-closure landfill care. If you're not careful, you may start out contracting with a company with a significant asset base being replaced by a new owner without those assets," he continues. "How you avoid that is a serious issue."

For municipalities with existing contracts specifically with USA Waste, "now is a good time to examine those agreements for clauses that allow reopening of negotiations as a result of change of ownership or lowered operating costs," advises Lynn Merrill, solid waste manager for the city of San Bernardino, Calif.

"Cities should bargain hard to reap the benefits of savings resulting from both streamlining and vertical integration in the merged company."

Merrill also sees a larger, more aggressive company. "There is a renewed danger for municipal collection operations and regional private haulers from this merger," he warns.

"Once Waste Management digests the merger savings, the only way they can ensure future corporate growth and satisfy stockholders will be through even more aggressive competition strategies and acquisitions," he says. "This means that they'll target cities for privatization and small haulers for acquisitions."

"The real question is 'How will this merger benefit the customer?'" Vasuki says. "Since customer satisfaction is the key issue in collection, if the consumer ultimately doesn't benefit, then opportunities will open up for other private contractors."

And, if this consolidation ultimately means at least one fewer company bidding for a contract, then those public sector operators tuning up to compete for collection contracts could benefit, too, he adds.

Although holding down costs while providing the same or better service is a primary tenet of consolidation, does this always hold true?

Vasuki, whose own landfills have not increased tipping fees in six years, feels that, in some cases, the consolidation will result in certain inefficiencies, "because all costs cannot be accurately predicted."

"This was the logical next step," Ruud says. "I don't think it's anywhere near the end of the consolidation trend."

Parker also sees more consolidation, asset swaps and mergers, "and maybe a few surprises." For example, he says, there are a dozen publicly-traded companies, "and it'll be interesting to see how many will still be picking up garbage in the next year or two."

Consolidation is part of the evolution of the industry, Gobin says - an evolution with several phases. "The late '80s early '90s consolidation was a continuation of consolidations from a decade earlier," he explains. "The current phase, which includes an upgraded executive corps, is the result of the investment community taking a serious interest in our industry."

Gobin sees the next phase emphasizing efficiency. "This is one of the most inefficient industries I've ever seen," he says and predicts that "we will start thinking like a Federal Express, applying those kinds of efficiencies and logistics to this industry."

"When the dust finally settles, you're going to have a stronger industry," but possibly fewer players, Parker says. "You're going to have players who can respond to situations, that have more financial capability, capital access and are more innovative. And you're still going to have a lot of mom and pops."

The "wild card" in the industry's future, Ruud says, "is whether technology will change and whether we will use alternative forms of disposal. That will affect the way our business develops long term. There may be substantial changes, but they will reflect changes in our culture."

Whether this merger fuels more consolidation, increased privatization or more independents selling is still to be seen. Merrill's advice to solid waste managers, however, may be the most fitting: "Sharpen your pencils, tighten your costs and hang on."

Although the new company will be named "Waste Management" and will be based in Houston, its key managers, particularly John Drury, are straight off USA Waste's roster.

Drury, board chairman since 1995 and CEO since 1994, will serve as CEO and chairman of the new company's executive committee board.

Drury also was president/COO of Houston-based Browning-Ferris Industries from 1982 to 1991.

To help him run the new company, Drury will bring in two top USA Waste execs: Rodney R. Proto (president and COO) and Earl E. DeFrates (executive vice president and CFO). Both will retain their former titles in the new company.

The two most visible members of Waste Management to serve in the new company are acting chairman and CEO Robert S. Miller, named as non-executive chairman of the new company's board of directors, and Roderick M. Hills, a current member of the board, who will chair the new board's audit committee.

The board of directors of both companies will designate equal numbers of members to serve on the new board.