Consolidation: Rearranging the Pieces

Cheryl L. Dunson

The recent rash of solid waste industry buyouts and acquisitions can be characterized either as merger mayhem or merger mania. Regardless of your point of view, representatives from most sectors of the solid waste management industry agree that the past 18 months have been nothing short of stunning.

There have been at least three major mergers and acquisitions in the past two years, and undoubtedly more will follow. Financial analysts forecast a pot of gold for shareholders at the end of the solid waste consolidation rainbow. Legal advisors caution the future is unpredictable. Officials with large private companies and trade organizations insist these changes are as superficial as a name or corporate logo. They predict the future will be business as usual, if not more aggressive.

The activity, to some degree, has been a standard industry practice for the past 10 years. But the entire business world watched with reverent surprise in March 1998 when smaller USA Waste Services Inc., Houston, approached industry leader Waste Management Inc., then in Oak Brook, Ill., to seal a $14.8 billion merger, that resulted in the most powerful of powerhouses ever witnessed in the industry.

Not to be outdone, one year later Allied Waste Industries Inc., Scottsdale, Ariz., dropped its own bombshell - almost on the anniversary of the WMI-USA announcement - with news that it would acquire the nation's second largest hauler, Browning-Ferris Industries (BFI), Houston. Valued at $9.1 billion, the buyout will give the newly created conglomerate control of $6.6 billion in revenues, once the deal is approved by the U.S. Department of Justice (DOJ), Washington, D.C.

And the consolidation craze doesn't seem to be ending, says Steve Goode, president of Marketing Research Group (MRG), Raleigh, N.C., which matches industry buyers and sellers.

"Although there might be fewer large acquisitions, we still see a good number of potential acquisitions between $5 million and $50 million," he says. "There also are numerous start-up companies with annual revenues ranging from $500,000 to $2 million. These start-ups are tuck-in opportunities for small companies to help them continue their external growth and become a good acquisition candidate for the future."

So how will all this affect you? How can you remain competitive? And what on earth is next?

The Consolidation Rainbow Legal advisors and local government officials caution that the future is unpredictable, and that local government is tied to an industry that it must work to keep openly competitive. However, financial analysts view the past year's consolidation activities as economically rewarding. Consolidation gives larger companies greater opportunities to restructure and fine-tune themselves for improved efficiency and profitability, they say. And, windows of opportunity will continue to exist for independents and local governments to join or re-enter the market, or expand their services.

"The garbage business is a local business, and the great equalizer is the willingness of someone to drive a prescribed distance to take business away from you," says Michael Hoffman, director of equity research for Credit Suisse First Boston, New York. "[Competition] is a natural measure to prevent price gouging. The only thing consolidation will do to the solid waste industry is to improve market share in [a particular] market and improve [customer] density."

Density is critical to a solid waste company's profitability and efficiency, with the key being to put as much trash in a truck and drive it as short a distance as possible. "I may have 30 percent of the total market share, but if my 100 units are spread throughout the community, it's not as fundamentally profitable as having 10 percent of the marketplace where all my units are tightly packed in one area," Hoffman explains.

He and his peers guesstimate the recent WMI-USA merger and Allied-BFI buyout constitute combined revenues from $1 billion to $2 billion that can be traded publicly to improve the companies' organizational structures and operations. But more importantly, the restructured companies will become more efficient, which will benefit stockholders, Hoffman says.

The number of changes resulting from the WMI-USA merger will improve the industry as a whole, says Jewel Sikes, WMI's vice president of corporate communications. "Before the merger, there were two companies with two different philosophies. One that was successful [USA] and one that was struggling [WMI]," she says. "The merger allowed the industry to get costs back in control, which benefits the shareholders, the customers and, ultimately, the employees -because they're working for a company with far greater stability than that of the old Waste Management organization."

Based on numbers alone, WMI's depth and breadth paints a vivid portrait of the consolidation's far reaching strength. Within the confines of North America, the newly revamped WMI now employs more than 56,000 solid waste professionals throughout its 600-plus operations and collection locations, more than 260 transfer stations and 300 landfills. The organization has a residential customer base of 26 million and manages a fleet of more than 34,000 vehicles. As of Dec. 31, 1998, estimated revenue was $12.7 billion.

"The most significant change has been decentralizing operations and empowering people to make decisions on the local level," which makes the new WMI more cost-effective, Sikes says. "The old WMI was a very centralized organization, and we're structured differently now."

When WMI moved its corporate office from Oak Brook, Ill., to Houston last year, staff was reduced from 1,000 people to approximately 300 - definitely "a cultural change," Sikes adds.

Size Doesn't Matter With larger companies getting larger, what is the role and future of smaller independents and local governments? Hoffman contends there always will be a place for them.

"There always will be new growth, new business opportunities and people who are willing to [collect waste] for a living," he speculates. "Very few [business owners] enter the market to sell their businesses. They go into business because solid waste is an essential service with virtually no risk of rate regulations, which are profit margin regulations imposed by a pubic service commission. High [revenue] returns are a function of how intelligently business owners manage their business. Smaller companies can have just as good a business or better than the larger companies. Size doesn't matter."

Ed Repa, director of environmental programs for the Washington, D.C.-based National Solid Wastes Management Association (NSWMA), agrees, adding that customer service will dictate the success of any private company, regardless of its size. "What you're seeing these days are companies that are going after service rather than just price," he says. "People want to see what kind of service you can offer and how you perform a job."

In addition to customer service, niche marketing will enable small solid waste service companies to compete.

"New markets typically won't be residential collection because there are only so many contracts and time frames." Repa says. "Instead, companies are coming in and are able to niche a market."

He says smaller companies can take advantage of large companies outside the solid waste industry that typically have operated in-house collection service and on-site disposal due to their vast size and waste generation rates. In light of heightened regulatory consciousness and economic competitiveness, these companies are questioning the efficiency of their collection and disposal programs, and whether it is wise to accept the liability associated with them. And as they do, more are contracting with solid waste professionals for service.

Meanwhile, the public sector could see a reduction in the number of municipal competitors in the next few years. Private sector consolidation has led to greater company efficiency, which in turn has required the public sector to examine its operations and raise the bar to improve services.

Of course the municipal players always will be there, but "more of them are asking themselves whether they want to be in the landfill business because of its capital intensiveness and the corresponding [regulatory] risk," Hoffman says.

NSWMA statistics indicate that of the nation's approximately 2,800 landfills, 36 percent or approximately 1,008 are owned by private companies. Five hundred of these belong to large, national waste conglomerates; the remaining 64 percent are considered public. The WMI-USA merger alone resulted in a total of 300 privately owned landfills, while the Allied-BFI buyout amassed 170 landfills.

"Data shows things are shifting to the private side with regard to landfills," Repa admits. "But it should stabilize in the future because smaller communities have pulled out of the business, and larger communities already have made the decision to stay put."

Officials with the Solid Waste Association of North America (SWANA), Washington, D.C., dispute the ease with which existing new companies can enter disposal and collection markets. At the organization's annual Senior Executives Seminar in January, SWANA officials pointed to the high cost of equipment as a barrier.

For example, for a new company to provide its customers with collection service adequately, SWANA estimates it would need five or more trucks for back-up purposes and maintenance. Additional vehicles also would be needed for recycling and yard waste collection. Also, existing contracts make it difficult to compete in some markets. The substantial capital and upfront costs to bid on larger contracts and franchises is prohibitive without deep pockets. Permitting issues can create an unfavorable climate for new companies to enter the disposal market as well, according to SWANA officials.

"There are pressures from Wall Street for return on investment rather than increasing market share," says John Skinner, SWANA's executive director and CEO. "There have been numerous asset and volume swaps among the large private companies, and we've seen acquisition of independents coupled with friendly mergers."

The effect is an integration of private services that may not bode well for small independents and the public sector, Skinner says. "By controlling collection and disposal, large companies essentially are creating a hub-and-spoke operation, which could be used to dominate the marketplace. This trend raises serious questions about the reduction of competition that may occur over the long term."

Repa concedes that the trend in the industry is towards integrated companies offering a full array of services. "That's where our industry is headed because customers demand it and cost can be controlled better."

John Hadfield, executive director of the Southeastern Public Service Authority (SPSA), Chesapeake, Va., says that when local governments begin to think like their private counterparts, they will succeed.

"Unless local governments change their attitudes and play the game the same way as the privates, we will be impacted by the consolidation of private companies," Hadfield predicts. "The private sector has shown us that the consolidation model works well for them and it improves cost and efficiency. Maybe we in the public sector should think strongly about consolidating our public assets. Instead of the public sector [infrastructure] being acquired by the private sector, it could be the other way around."

Rising from being the SPSA's second employee in 1978, the year of its inception, to being executive director 20 years later, Hadfield has witnessed the construction of seven major private landfills in Virginia by six different companies. Today, the same facilities are owned by just two companies, assuming the Allied-BFI buyout is approved. Ten years ago, a dozen small companies collected waste in the Chesapeake community. Today, only three remain.

Nevertheless, Hadfield believes local governments can compete with large private companies by drawing on creative vision and business acumen. A few years ago, SPSA restructured its tipping fees to be more competitive with private facilities, enabling the organization to market its landfill, waste-to-energy facility and eight transfer stations to private collectors. The result: retaining 90 percent of the waste generated in its service area, despite the presence of a private transfer station and landfill within an 80-mile radius.

"The approach we've taken with our board of directors' understanding is to cut tipping fees for unprocessable waste from commercial customers from $48.50 per ton to $18.50 per ton," Hadfield explains. SPSA, which has 450 employees managing almost 1 million tons of waste annually, contracts with eight local communities to provide various solid waste services. The communities pay SPSA through tipping fees at their facility.

"If we don't have that commercial waste coming in, our communities' cost actually would be $95 per ton," he says, noting that the commercial waste helps to subsidize SPSA's operation and keep the communities' tipping fees steady. Hadfield concedes a strong education program was critical to securing the eight communities' support for the tiered tipping fee structure.

In addition to examining internal operations, he suggests local governments look at new business opportunities arising from the private sector's possible return to its core business of collection and landfill disposal.

"During the merger with Allied and BFI, we've heard key company officials say the new company will not compete in the recycling collection market," Hadfield says. "Perhaps there are some opportunities for us since we have our own recycling business that could be offered to neighboring communities currently not being served by SPSA."

The Pros of Privatization Representatives from the independents and the public sector agree - becoming more competitive will be challenging, but it is achievable. In addition to niche marketing, creative pricing strategies and becoming more like their private counterparts, the public sector can partner with the private sector through outsourcing or privatization.

"Privatization is a key issue, but only if local governments contract services while maintaining ownership of their landfills," says Edward Caylor, president of Cleveland, Tenn.-based Santek Environmental Inc., which manages seven publicly owned landfills across the southeast and one industrial landfill. Santek helps local governments to remain competitive in the disposal market by offering engineering, construction and environmental monitoring services.

"Even though [company] names have changed and new identities have been created, we're still talking about the same players and the same philosophies," Caylor continues. "[The industry] still is all about quarterly earnings rather than the true operators in the business, and that gives us opportunities because we know how to operate on slimmer margins."

Caylor says privatization is a viable option for small- to mid-size local governments, but only if the partnership is structured fairly. "Local governments need to remain in control of their infrastructure, but it's harder for them to compete with the private sector because of the governmental mandates and constraints," he says.

One local government official who has managed to maintain the delicate balance of public infrastructure serviced by private contractors is N.C. Vasuki, executive director of the Delaware Solid Waste Authority (DSWA), Sussex County. Between three solid waste landfills, one transfer station and residential and commercial collection routes, the DSWA contracts with a variety of small and large private companies to manage the region's 2,600 tons of waste per day.

"I know we live in a world where everything goes in cycles and this is the cycle for mergers and acquisitions," Vasuki says. "The new CEOs of these companies will decide suddenly that they're too big and they'll start selling off assets."

To keep the DSWA's contractors competitive as well as comply with Internal Revenue Service regulations, the agency reduced its contract terms from five years to three. "We go out to bid knowing that we have the ability to run the business ourselves if the bids are outrageous," he says. "We know we can run a landfill for $1 million a year, and we know private companies need to make a reasonable profit. We add those things onto our internal cost and if it's within a reasonable range, we let the private sector manage the facilities and programs."

Currently, the authority contracts with WMI to run the agency's transfer station and scrap tire program. BFI collects all of the authority's recyclables, and two local companies manage DSWA's disposal facilities.

Vasuki says he doesn't fear for the longevity of his smaller service providers or public peers. "With the right people, the smaller local governments can compete very effectively because they're nimble and don't carry a big overhead."

Looking into the Crystal Ball In the mid-1990s, Vasuki predicted that seven private companies would control the majority of the solid waste market by the year 2000. He wasn't far off the mark.

He and others believe consolidation will continue. But as long as a relatively free market exists, private and public market participants of all sizes should fare well.

"If trends continue, our industry will be an oligopoly," Vasuki says, meaning that there will be a small enough number of sellers that their actions will affect the market significantly. "You see it happening in all businesses. Look at the publishing business and TV companies ... What's important is if competition is reasonably fair and open, it will work. It's up to the government to keep it like that."

While members of the Washington Refuse and Recycling Association (WRRA), Olympia, continue to evaluate consolidations and their impact on their individual livelihoods, Jay P. Jones, WRRA executive director, says it's all part of life.

He admits his organization, consisting of 100 solid waste companies, including collection and landfill operations, and 80 to 100 associate members, "still is trying to come to terms" with the frenzied coalescence of solid waste companies.

"At any time, in any town, on any street that you walk down, you'll see a Shell or BP gas station," he says. "You'll see that Bank America has replaced your local banking institution, and that the hotel on the corner is a franchised Hilton or Doubletree. This is the way America has been moving and our industry is no exception. The most important thing to remember is people put their waste on the curb and they want it picked up," he adds. "Our job is to make sure that the system keeps working."

Most mergers actually benefit competition and consumers by allowing firms to operate more efficiently, says Eric Bock, an attorney with Baise, Miller & Freer, Washington, D.C.

As long as the competition is fair, allowing the marketplace to run its course by dictating who stays in business is the best policy, he says. This requires providing information to the appropriate federal agencies so they can sign off on the merger, allowing for litigation if necessary and allowing the federal agencies to have enforcement powers if the conditions of the merger are not met.

Having served as legal counsel for several solid waste trade organizations, including the Washington Refuse and Recycling Association (WRRA), Olympia, Bock says the federal administrative process of evaluating the mergers of large, publicly traded waste companies could be improved to avoid unfair competition.

The Bureau of Competition of the Federal Trade Commission (FTC) and the Department of Justice's (DOJ) Antitrust Division share responsibility for enforcing federal laws that promote competition in the marketplace.

"The FTC is a consumer protection agency with two mandates under the FTC Act: To guard the marketplace from unfair methods of competition and to prevent unfair or deceptive acts that harm consumers," Bock says. "These tasks involve the analysis of complex business practices and economic issues ... and some cases are easier [to decide] than others."

In light of the WMI-USA merger followed a year later by the Allied-BFI buy out, Bock contends the FTC and DOJ evaluation process limits the ability of private citizens - owners of independent solid waste companies - to provide input about whether a potential merger will result in unlawful market share or prices. "The government assumes a we'll-call-you, don't-call-us philosophy, and there's no public comment period," he says.

Michael Hoffman, director of equity research for Credit Suisse First Boston, New York, says information is easy to get because all FTC and DOJ activities usually are public record.

But, unless you're a stockholder and are privy to company information and meetings, learning about potential mergers is difficult, Bock says. "Sure, there are filings to be made with the government in advance of a merger and a review period by the government during which time it can come back and ask for more data about the marketplace, but all of these forms and filings are complicated and elaborate, and unless you know what to look for, it becomes difficult."

Once a potential merger becomes public knowledge, providing input into the regulatory review of the transaction is arduous at best, Bock says. "There's always the possibility of a lawsuit by a shareholder trying to find out what's going on," he says. "Or, a private party can file a lawsuit, claiming a proposed merger is essentially anti-competitive and should not be consummated. Certainly, filing a lawsuit is something that can be done, but the courts are going to take a real hard look at the type of injury the plaintiff will sustain."

Proving that a merger or a company's action is anti-competitive is difficult because it requires costly market power analyses and descriptions of the markets and the participants, Bock says.

Although they're on the outside looking in, Hoffman says DOJ and FTC officials do understand the subtlety of the marketplace vs. customer density, and they have a sharp perspective of the industry as a whole.

"This is not a complicated business," Hoffman says. "It's as easy as going to the Yellow Pages to get a list of all the players to determine the layout of a specific market. I know for a fact that [DOJ and FTC] officials asked WMI, Allied and all previous consolidation players for truckloads of data. The attorney generals of each state also have a keen and active interest in what transpires."

But, therein lies the problem, Bock says. "Because [mergers] are huge undertakings as far as federal resources and manpower are concerned, government officials depend on the merging companies for information," he says. "So, you have to ask, 'to what extent are they reaching out to others and what opportunities does a company have to give its two cents worth?'"

The challenge ahead, Bock says, is to perfect the regulatory review system to allow for equitable and timely input for all potentially impacted parties.

For solid waste trade organization officials in the private sector, the merger mode has created some unique advantages and some positive challenges that eventually will need to be overcome.

"We see the [Allied-BFI] merger as advantageous," says Ed Repa, director of environmental programs for the Washington, D.C.-based National Solid Waste Management Association (NSWMA), which represents the private sector. "From the publicly traded companies' perspectives, we represent all of them and we were missing BFI. With the Allied purchase, BFI facilities become a part of our organization, which increases our membership."

But, consolidation also brings with it a loss in the number of smaller companies that were once members. "And, that's hurtful," Repa admits. "Membership dues are based on revenue so when larger companies at the top of the revenue scale tuck in a small company, we no longer get the [membership] dollars from the smaller company."

When asked how the Washington, D.C.-based Environmental Industry Associations (EIA), of which NSWMA is a part, will deal with the loss, Chaz Miller, acting director of state programs, simply responds, "Work harder."

Another challenge for Repa and his staff is continuing to represent and meet the needs of the smaller companies in his membership, while his publicly traded members grow bigger and stronger. This means reaching out to the independents on a state level and holding to NSWMA's one-vote-per-company philosophy when weighing support or opposition for regulatory and legislative issues.

"The small guys tend not to participate on a national level ... and there are so many companies that don't have Washington [D.C.] representation," Repa says. "We try to keep our members informed about the issues, be their voice on the Hill and communicate with them about how certain issues will affect their businesses."

Columbia County, Ga.'s solid waste manager Don Bartles, says there was a competitive and plentiful market of 30 solid waste companies servicing the metro Augusta, Ga., area just five years ago. Today, the number has been cut in half, and he predicts within the next five years the number will be reduced to five.

While he has yet to encounter any broad, sweeping ramifications to his own solid waste program, he predicts the consolidation craze eventually will have an impact on his community.

"I think [large company officials] still are assessing what they're doing and what they need to do in this particular region," Bartles says. "I see more trading of service areas ... but I don't foresee any of the large companies purposefully going out to beat up on local governments. It'll just be a matter of attrition. But, once we've gone away and we're not a player, there will be four or five firms to control the infrastructure from the ground up. It'll be an oligopoly"

Bartles and his staff manage a 300 ton per day solid waste landfill complemented by an on-site drop-off recycling and paint recovery center, white goods program, and scrap tire collection area. In recent days, the Baker Road Landfill has weathered the threat of a private transfer station and the death of one of its most reliable haulers. With no collection vehicles of his own, Bartles is dependent on public and private haulers for volume, and this makes him cautious.

"There'll be three or four companies that own the whole shop," he says. "[Consolidation] will make it easier for elected officials to feel comfortable about contracting services because they're dealing with Fortune 500 garbage companies."

And, with the retreat of local governments from the marketplace, Bartles says the result will be fewer services at a higher cost. "The bigger firms aren't going to do recycling and recovery for the sake of public relations," he says.

"They cannot keep offering those services competitively unless local government is willing to pay for it or subsidize it," he continues. "None of them will sacrifice profit margin for competition."

Bartles surmises the future of recycling will become contingent on local governments' environmental goodwill and public coffers because there are no mandates on private companies to reduce waste streams.

Coupled with the corporate mandate to streamline operations and increase profitability, local governments will be left holding the proverbial blue bag.

"The people leading these global strategies did not assemble these large firms just to have a logo," he says. "They're in business to make money, and surely no one would disagree that a community can't survive unless solid waste management is part of its portfolio."