News: Analysis & Commentary: DEALS
CAN WASTE MANAGEMENT CLIMB OUT OF THE MUCK?
It's betting a merger with USA Waste can fix a heap of problems
Where most people looked at piles of refuse and saw plain old garbage, cousins Dean L. Buntrock and H. Wayne Huizenga smelled fame and fortune. Thirty years ago, they began cobbling together some 3,000 mostly family-owned waste-hauling businesses to forge the national network of garbage hauling and hazardous-waste operations known as Waste Management Inc.
Today's Waste is still the largest player in the garbage industry. But otherwise, it is hardly recognizable. Huizenga left in 1984. Buntrock, Waste's long-time chairman, who had retired only to be rushed back into service in 1997 when his successor, Phillip B. Rooney, resigned under investor pressure, was nudged off the board at the end of that year by a group of outside directors.
Humbled by severe downturns in its core markets, poorly timed and badly executed expansions, and self-inflicted accounting gaffes, once-proud Waste's fate as an independent company was sealed on Mar. 11. In a stunning acknowledgement of its fall, Waste agreed to be acquired in a $13.5 billion transaction by USA Waste Services Inc., a company with less than one-third its $9 billion in sales. Waste, the creator of the modern garbage business, is turning itself over to a management team led by USA's acquisition-minded chairman, John E. Drury, an industry veteran who just joined USA four years ago.
It was the best news Waste's shareholders had seen in years. Its share rose 16.4%, to 29 5/16. Investors such as Nell Minow, a principal at Lens Fund, were particularly pleased. Recently, Minow has been agitating for Waste to do a deal. Equally happy is another long disgruntled holder, Soros Fund Management, owner of 6.2% of Waste. Says Soros Managing Director Stanley F. Druckenmiller of Drury: "This is the best CEO in the industry." Druckenmiller and Minow are convinced that Drury will be able to quickly wring at least $800 million in costs out of the combined company.INCONSISTENCIES. The deal might have been done months ago. Drury approached Robert S. "Steve" Miller, an outside director and turnaround specialist when he was appointed interim chairman and CEO on Oct. 29. Miller thought the company could survive on its own. But that was before he started digging into its problems--and before his Feb. 24 bombshell. That day, Miller announced $3.5 billion in charges to clean up the company's books--restating five years of earnings and taking massive charges to adjust for overambitious accounting practices. The charges covered everything from overvalued acquisitions to questionable treatment of landfill assets--a "sobering and embarrassing" series of missteps, says Miller, adding: "This merger makes it much easier to change the operating dynamic at Waste."
The write-offs illustrate how important such change will be. Behind those numbers, according to interviews with more than a dozen former senior officials who refused to be quoted by name, lie accounting procedures riddled with inconsistencies. District officers were allowed to set their own pricing and determine the useful life of landfills for accounting purposes. For example, one former district controller in the Southwest says he never assigned scrap values on trucks and containers, while one in the Southeast says he always looked for the best deal. There could be different definitions of a "route hour"--how the company allocated costs to a driver's work--that could affect how a district priced contracts. "There was no consistent operating model," says a former headquarters exec. "It was dysfunctional."SO MANY DUMPS. The numbers grew even more flaky when aggressive accountants consolidated results back in the Oak Brook (Ill.) headquarters. Miller and former officials say the bean counters used depreciation schedules and asset valuations that were even more optimistic than those set in the field. In district offices, for instance, trucks and containers were depreciated according to industry standards--8 years on trucks, 10 on containers. But at headquarters, equip- ment was depreciated over as many as 13 years, enabling the company to minimize annual expenses. The total hit to adjust for depreciation for trucks and equipment: $716 million.
There were major lapses, too, in accounting for landfill development, write-offs for areas that were never granted permits, and environmental liabilities. Former officials say areas where permits were denied would be kept as assets a bit longer than they should have been, one former controller says. If permits were being sought for a given amount of space for a landfill, with plans for more later, the larger asset might be booked, says another former official. The cost just to fix improper accounting for capitalizing the interest expense on landfills: $210 million.
The breakdown in accounting procedures appears to have happened as the company's growth screeched to a halt in the early '90s, as the basic business softened and its diversifications faltered. Waste was saddled with a surplus of dump space and faced declining prices. As its stock stalled, acquisitions were no longer feasible, thereby cutting into growth. One way out was a costly overseas push. Another, it now appears, was to try to mask the problems with accounting. Says Miller: "The best we can guess is we got off track in the '90s, coincident with our declining fortunes."
But Waste's problems went beyond accounting. As revenue growth stalled, the company lurched from strategy to strategy--one year urging regional operatives to boost market share, the next to focus on profitable accounts. Former execs say that led to confusion and declining morale. "We would benchmark against GE or FedEx, but because it might take years to put in place, we didn't have the fortitude to stick with it," says one. FINGER POINTING. Who is responsible for Waste's woes? Investors and analysts blame a cast of characters--Buntrock, Rooney, former Chief Financial Officer James E. Koenig, and Waste's long-standing auditors, Arthur Andersen & Co. Miller has pledged to get to the bottom of who "should be held responsible among our executives and auditors," but is not pointing fingers yet. Lens's Minow has no qualms: "Andersen owes the shareholders some money. They are there to prevent exactly this kind of surprise, and we urged them to switch auditors." Rooney, Koenig, and Buntrock declined comment on who was responsible. Citing firm policy, Andersen declined to discuss Waste.
Drury vows to get the new Waste back on track--and back on the acquisition trail. "We see this becoming a much bigger business," he says. "We can grow the top line 11% to 15% on its much larger base." That's fine--as long as he manages accounting better than the old Waste did. Melissa M. White an analyst at Piper Jaffray Inc. and a former Waste official, notes that USA, like Waste in its early days, has been run leanly and in a decentralized fashion. "One of the biggest risks is whether they have the right systems and controls in place" for a much bigger company. If not, can this combo stay at the top of the heap?By Richard A. Melcher in Chicago, with Gary McWilliams in HoustonReturn to top