Allied Waste Industries, Inc.

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Allied Waste Industries, Inc.

15880 N. Greenway-Hayden Loop, Suite 100
Scottsdale, Arizona 85260
U.S.A.
Telephone: (480) 627-2700
Toll Free: (888) 208-1000
Fax: (480) 627-2701

Public Company
Incorporated: 1987
Employees: 29,000
Sales: $5.6 billion (2001)
Stock Exchanges: New York
Ticker Symbol: AW
NAIC: 562212 Solid Waste Landfills Combined with Collection and/or Local Hauling of Non-Hazardous Waste Material

Allied Waste Industries, Inc. (AWI) is the second largest non-hazardous solid waste company in the United State (the largest company is Waste Management). AWI serves approximately 10 million customers in 39 states. The company is actually comprised of 355 collection companies (which AWI bought or merged with), 181 transfer stations, 167 landfills, and 65 recycling facilities. Allied Waste’s customer base is residential, commercial, and industrial.

Allied Waste’s Roots: 1987-1990

Bruce Lessey serviced garbage trucks in Houston when he decided to become part of the industry itself. He founded Allied Waste in 1987 as a public company, and began buying waste companies. In 1989 his company was in financial trouble. Roger Ramsey, a cofounder of garbage industry giant Browning-Ferris Industries, Inc. (BFI), and a partner in Houston Partners, LP, an investment company that owned part of AWI, joined Allied Waste’s board of directors in August 1989. At the time, Lessey said that Ramsey brings “significant knowledge and experience to the organization.” He felt confident that Ramsey would help Allied Waste become a national company.

The young company experienced difficult years during 1989 and 1990. In September 1989, Lessey was appointed vice-chairman and CFO. In its place as president AWI selected Fred Ferreira, a man who brought over 20 years of industry experience (many of them with Waste Management, the largest company in the field) to his new position. By the end of October 1989, Lessey left AWI, the company announcing only that he was returning “to the venture capital industry.” Ramsey became the company’s CEO in 1990.

Early Company Growth: 1990

Allied Waste started the 1990s with its acquisition of Sanco, a solid waste company that served northeast New Mexico. Fred Ferreira said of the acquisition: “Sanco exemplifies AWI’s acquisition strategy; to continue with a national expansion program of acquiring profitable and well-managed waste collection and disposal companies.”

In early 1990, Daniel J. Ivan joined AWI as vice-president of Market Development. Ivan came from industry leader Waste Management, where he worked with Ferreira. In October 1990, Ivan was promoted to president, in place of Ferreira who resigned “for personal reasons.” At that time, AWI was poised to begin a program of mergers and acquisitions that would lead it from a small solid waste handler to a giant rivaling Waste Management, all in a relatively short period of time. Interestingly enough, the company first concentrated on markets small enough (communities of less that 50,000 people), so as not to compete with the big names, according to Ivan.

In March 1991, AWI purchased 80 percent of CRX, a solid waste company headquartered in Fremont, Nebraska. This purchase was the first step to an eventual complete acquisition of CRX by AWL CRX owned and operated landfills, transfer stations and collection services in Nebraska and Iowa. AWI viewed CRX’s assets as a base “from which to expand into surrounding market areas.”

In September 1991, with markets in Iowa, Missouri, Nebraska, New Mexico, and, of course, Texas, AWI was listed on NASDAQ under the ticker symbol AWIN. The company than purchased Super Services Waste Management, Inc., headquartered in Flagstaff, Arizona. The Super Services acquisition gained Allied Waste entry into new markets in Northern Arizona, and Nevada, and expanded their operations in New Mexico. Other purchases in 1991 expanded the existing markets in the above five states.

In 1992, AWI purchased two Illinois companies that, according to Ramsey, established “a new regional base for Allied’s continued growth into a national solid waste management company.” While the companies, National Scavenger Service, Inc. (hauling and transfer station), and R.I8 (landfill), indeed established a new regional base for the growing Allied Waste, the purchase’s true significance was bringing together Thomas Van Weelden and Roger Ramsey.

Van Weelden comes from a family with deep roots in the waste industry. At one time, 25 people in his family worked in this industry. His father owned a garbage hauling company in Chicago. Van Weelden started a small company of his own in 1975, working the trucks until noon and soliciting new accounts for the rest of the day.

He built up his company and caught Ramsey’s attention in the early 1990s. Van Weelden and Ramsey found they had a lot in common, and Ramsey recalled that the first time they got together, “One of us would start a sentence and the other could finish it. It was incredible.” Their business sense was so compatible that they shared an office for seven years, to cut down on meetings time. It was the combination of Ramsey and Van Weelden that took AWI to its place as one of the leaders in its industry.

Thomas Van Weelden was an unusual leader. “In my family,” he said in a 1997 interview with Forbes, “there is nothing wrong with being a garbage man.” Consequently, Van Weelden required his management trainees to spend a year on the trucks. And he did not like to micromanage. In 1999 he said: “If I need a staff meeting every week to tell my guys what to do the following week, I got the wrong guys.” His unorthodox methods also included taking huge risks. When AWI bought Laidlaw’s North American solid waste business for a staggering $1.5 billion, the resulting debt the company carried was three times its equity.

While the garbage industry shied away from vertical integration, Ramsey and Van Weelden based their rapid growth strategy on exactly that concept. The strategy proved successful. When Van Weelden joined Allied Waste, annual revenues were $35 million. By the end of 2001, revenues reached roughly $5.6 billion.

Rapid Expansion and Growth: 1993-1996

With Van Weelden and Ramsey at the helm, the company continued to grow. Van Weelden’s philosophy was to not set limits on its expansion. The company increased its landfill area by 53 percent in 1993. Also in 1993, due to intense competition from Browning-Ferris Industries, AWI moved its headquarters from Houston to Scottsdale, Arizona. New acquisitions throughout the early 1990s expanded Allied Waste’s role in established markets (such as Illinois), and gained it new major markets, such as Georgia (with the acquisition of Southern States Environmental Services, Inc. and related companies), and St. Louis, Missouri (with the acquisition of Midwest Waste Inc. and related companies).

In 1996, during a time of rapid consolidation in the waste industry (the result of tightening environmental control regulations), Allied Waste announced what was, according to Roger Ramsey, “the biggest deal ever in the industry.” AWI paid $1.5 billion ($1.2 billion in cash, the rest in stock and notes) for the North American solid waste unit of Laidlaw, Inc., a Toronto-based company. The acquisition was completed on December 30, 1996. Laidlaw, also a provider of school bus and ambulance services, saw its solid waste business constantly underperforming. The purchase brought AWI into 17 new markets, and made it the fourth largest trash-disposal company in the United States. AWI’s annual revenues shot from $169 million to approximately $1 billion as a result of the purchase. While many analysts were alarmed by the debt Allied Waste took on (its debt-to-capital ratio rose to 82 percent as a result of the purchase), Ramsey was confident the decision was right. “We wouldn’t have taken on this risk if we didn’t think we could manage the debt,” he said. In 1997, AWI sold the Canadian operations it bought from Laidlaw to USA Waste Services, Inc, for $518 million. Ramsey noted that in the rapidly changing garbage-disposal industry, “We’ve created a new force. We believe this transaction will ensure our survival.”

Key Dates:

1987:: Bruce Lessey founds Allied Waste Industries (AWI) in Houston, Texas.
1989:: Roger Ramsey joins AWI; and Lessey leaves the company.
1990:: Ramsey is named CEO of AWI; and the company acquires Sanco, a solid waste company in New Mexico.
1991:: The company acquires CRX, headquartered in Nebraska, also servicing Iowa.
1992:: The company buys Tom Van Weelden’s Illinois waste-disposal company; and Van Weelden is named president of the new AWI.
1993:: AWI moves its headquarters to Scottsdale, Arizona.
1996:: The company acquires Laidlaw Inc.’s non-hazardous solid waste operation for $1.5 billion.
1997:: Laidlaw’s Canadian solid waste operation is sold to USA Waste Services for $518 million; and Van Weelden is named CEO.
1998:: Roger Ramsey steps down as chairman, and is succeeded by Van Weelden; and AWI expands into the Pacific Northwest with its purchase of Rabanco Company and begins trading on the New York Stock Exchange.
1999:: AWI buys Browning-Ferris Industries (BFI) for $9.1 billion.
2001:: Van Weelden assumes role as president, as well as chairman and CEO.

The BFI and Rabanco Acquisitions: 1997-1998

Browning-Ferris Industries, Inc. (BFI) was at one time the second largest solid waste disposal company in the world. In addition to its formidable presence in the United States, by the mid-1990s, BFI had contracts in Asia, the Middle East, Europe, New Zealand, and Australia. The company was founded in 1966, just as regulations regarding waste disposal were changing. Unlike many family operations, BFI managed to raise capital, through shrewd financing and acquisitions, which allowed it to stay in business and prosper. But by the end of the 1980s, the company was experiencing trouble. It was facing charges of price-fixing and illegal hazardous waste handling. And while BFI seemed to have rebounded in the mid-1990s, the late 1990s found it struggling again. In 1997 it sold its properties outside the United States. Two years later, the smaller AWI came calling, with a roughly $9 billion offer, and BFI became a wholly owned subsidiary of AWI. The deal increased AWI’s debt to a staggering $10.2 billion, and brought its revenues to $6.3 billion when the deal was finalized. With BFI now part of AWI, the latter jumped from the fourth largest waste disposal company in the United States to the second largest, swallowing a company that had been in business for some 30 years.

Allied Waste’s acquisition of BFI came shortly after USA Waste Services purchased the formidable Waste Management, the largest waste handling company in the United States (USA Waste kept the Waste Managment name intact). At that time, the Justice Department came under fire for being too easy on USA Waste Services—to gain the buyout approval, USA Waste only had to divest assets that totaled $275 million in annual revenue. Perhaps due to that criticism, the Justice Department was tougher in its requirement when it came to AWI’s purchase of BFI. In July 1999, AWI agreed to divest some 50 landfills, transfer stations, and hauling operations. These assets totaled roughly $197 million in annual revenues, a proportionally much bigger divestiture than the one required of USA Waste. In addition, AWI had to sell its interest in three American Ref-Fuel plants (American Ref-Fuel specializes in the conversion of waste to energy). As AWI always shied away from hazardous waste, BFFs medical waste unit was sold to Stericycle of Illinois, and the proceeds, some $440 million, were used to trim AWI’s debt resulting from the BFI deal.

In 1998, Allied Waste expanded into the Pacific Northwest buy acquiring the Rabanco Company for $400 million. That same year, the company growth reached a point where its upper management felt it was appropriate to transfer their listing to the New York Stock Exchange. AWI started trading on NYSE on December 30, 1998.

Changing Focus: 1999 and Beyond

While BFI’s purchase was a major triumph for Allied Waste, the resulting financial burden made for a difficult year in 1999. The company was unable to divest assets as quickly as it had anticipated, and as a result of the BFI transaction, its size tripled in a very short period of time. In AWI’s 1999 annual report, Van Weelden said: “Going forward, it all comes down to our ability to control costs and deliver margins on a much larger asset base than before. The focus will be on operating efficiently.”

AWI moved forward with trying to bring up its internalization rate—the rate of collected trash dumped in the company’s own landfills. The rate had dropped substantially following the Laidlaw acquisition, to about 50 percent. At the time BFI was purchased, the rate was 57 percent. AWI targeted its internalization rate at around 70 percent. Other plans for the company included asset swaps and acquisitions in select markets, while divesting of assets that were not fully integrated into the company’s operations or vertical integration strategy. As then COO Larry Henk said: “Today, acquisitions will be the icing on the cake, rather than the cake itself.” More emphasis was placed on paying down debt and increasing free cash flow.

The strategy seemed to have worked. By the third quarter of 2000, the company’s internalization rate was up to 65 percent, ahead of schedule. Of course, cost-cutting measures had to include reduction in headcount, and the company cut some 2,900 jobs in 2000.

The economic recession in 2001, combined with the dramatic reduction in travel and tourism following the tragic events of September 11, 2001, affected AWI just as it was outgrowing its post-BFI-acquisition growing pains. Third quarter net income in 2001 was $.13 a share, as opposed to $.27 per share in the same quarter in 2000. Shortly after these results were announced, Larry Henk, AWI’s president and COO resigned, citing personal reasons. Van Weelden became president, in addition to his roles as Chairman and CEO. Yet not all the news was bad. Despite the sagging economy and the effects of September 11, AWI generated an impressive $480 million of free cash flow and reduced its debt by $389 million that same year.

As Allied Waste entered 2002, it appeared that the second largest solid waste disposal company in the United States was working its magic again. Net income for the first quarter was $32.4 million, compared to a loss of $36 million for the same period the previous year. To accommodate its growth, the company was revamping its infrastructure, expanding from two areas, eight regions, and 46 districts to four areas, 12 regions, and 58 districts. Internalization rate increased to 67 percent by the end of 2001. Unlike BFI, which moved away from decentralized management and became stagnant, AWI stuck with its decentralized model and continued to grow. With a proven strategy, an experienced management team, and with the mad rush to consolidate finished for now, AWI seems well positioned for long-term success.