Page One Feature
Star Rescue Team Gets Tarnished
By Taking On Waste Management
By JEFF BAILEY
Staff Reporter of THE WALL STREET JOURNAL
There is a certain glamour to corporate rescue work, to swooping in after
disaster strikes, pushing aside the bumblers and, with the dispassionate logic
of an outsider, setting things right.
But, as three board members at Waste Management Inc. are finding, there is
no glamour the second time around. As newcomers in 1998, the three thought
they had fixed the giant trash hauler. They scrubbed its books and merged it
into a scrappy competitor with well-regarded management. The stock soared.
Then, this past July, profits fell short of expectations. The stock plunged. The
merger, it turned out, was in disarray. The company's books were again a
shambles. And top management had to be thrown out. The three board
members stepped in again to run things. This time, it was their mess. And they
have been struggling to salvage not just a troubled company, but their own
reputations.
"We're all embarrassed," says Robert S. "Steve" Miller, whose work at
Chrysler Corp. and many high-profile basket cases over two decades has
made him one of corporate America's more celebrated Mr. Fix-Its. Adds
Roderick M. Hills, a former Securities and Exchange Commission chairman
who heads Waste Management's audit committee: "I'm not proud of the fact
that, in retrospect, we didn't know what the hell was going on."
This is the humbling account of a high-profile rescue
team's second tour of duty, not yet finished, at Waste
Management: the sensitive matter of succession when
the chief executive officer is desperately ill; the
surprise delivery of a $40 million corporate jet that
they didn't know had been ordered; dubious insider
stock sales; the indignity of enduring a lengthy
I-told-you-so from the company founder, who
opposed the merger -- and who now has sued
Messrs. Miller and Hills, blaming them for ruining his
creation.
The job has been complicated by the three directors'
conflicting personalities. Mr. Miller is too easygoing, his cohorts say. Mr. Hills
is so tough at times that the others wince. And the third, shareholder activist
Ralph V. Whitworth, has had to become a boss instead of a critic. Surprised
last July to find himself acting chairman at a company with 68,000 employees,
the 44-year-old Mr. Whitworth declared: "I'm the dog that caught the car."
Mr. Whitworth has spent so much time at company headquarters in Houston
that his wife, Wendy Walker Whitworth, producer of the "Larry King Live"
TV show, recently greeted him on the doorstep of their Rancho Santa Fe,
Calif., home with this comment: "I figured this was the only way I would get
your attention." She was wearing a black garbage bag, holes for head and
arms, her blond hair adorned with red twist ties.
For nearly a decade, people in the garbage business have contended that a
smartly run company could defy some basic industrywide problems. A glut of
dump capacity that emerged around 1990 depresses disposal prices. And
garbage piles up only as fast as the economy moves, so it isn't much of a
growth business. Still, the industry has managed to obscure these facts with an
unending acquisition binge. The Waste Management directors would be well
into their second tour of emergency duty before they fully understood this fact.
Indeed, an acquisition had been the centerpiece of their first run at saving the
company. Mr. Miller had stepped in as Waste Management's interim CEO in
1997 at a time when the company was under siege. Massive accounting
problems that had overstated profits for years were bubbling to the surface,
hammering the company's stock.
An intensive audit overseen for the board by Mr. Hills, who had been named
a director in late 1997, led to a $3.54 billion pretax charge in February 1998.
Shortly thereafter, USA Waste Services Inc., a smaller but fast-growing trash
hauler whose CEO, John E. Drury, was a garbage man's son, agreed to buy
Waste Management for $13.43 billion. Mr. Drury had once been the No. 2
executive at Waste Management's archrival, Browning-Ferris Industries Inc.;
he had been fired in 1990, but had re-emerged as a trash-industry star at
USA Waste. And Mr. Drury's top outside adviser on the deal was Mr.
Whitworth, whose firm, Relational Investors LLC, specializes in cajoling
managements into painful restructurings.
When the merger was announced, Mr. Miller lauded USA Waste for having
"the ideal senior management team." Wall Street was enthusiastic. The only
notable opposition came from Dean L. Buntrock, Waste Management's
founder and former longtime CEO. He wrote a letter trying to dissuade
directors from the deal. He argued that USA Waste's various businesses were
weak, that its computer system wasn't powerful enough for the merged
company, and that Mr. Drury wasn't qualified to run the combined operations.
He pleaded with the board to find its own CEO.
But since many of the accounting and other problems that got Waste
Management into trouble in the first place occurred on Mr. Buntrock's watch,
he had little credibility with his company's board. It approved the merger. The
new company adopted the Waste Management name and made Houston,
where USA Waste was based, its headquarters. Mr. Miller was to be
chairman for one year. Mr. Hills stayed on as audit-committee chief. And Mr.
Whitworth joined the board as head of the corporate-governance committee.
The heavy lifting was over, or so the three directors thought.
They hadn't attended the USA Waste board meeting on July 15, 1998, the
day before the deal closed. Investors had bid up the company's stock about
40% since the merger was announced, boosting the deal's value to $19.13
billion.
Soon after the announcement, USA Waste had ordered a Gulfstream IV
corporate jet for Mr. Drury at a cost of about $30 million. But at the board
meeting, Richard J. Heckmann, a USA Waste director and an airplane
enthusiast, took note of Waste Management's substantial international
operations and suggested that a Gulfstream V, with its longer range, might
now be in order. "It's the only way you're going to go nonstop" from Houston
to London, Mr. Heckmann explains in an interview. G-Vs, as they are
known, sell for about $40 million.
There was the matter of the G-IV and the $2 million nonrefundable deposit
USA Waste had already made on it. But another USA Waste director, Kosti
Shirvanian, had watched the value of his holdings in the company rise to
nearly $500 million, up from about $175 million in 1996. "I made a motion to
buy a G-V," Mr. Shirvanian recalls. Why? "Because I wanted the G-IV." He
bought it for his personal use, and USA Waste ordered a G-V.
Jerome B. York, another USA Waste director who is
often a stickler on discretionary expenses, was
disgusted, and got up and left the room.
During his years at USA Waste, Mr. Drury had won
over Wall Street by seeming to manage a series of
ever-larger acquisitions without a hiccup. And in the
weeks after the Waste Management deal, he said the
combined company would meet its cost-cutting target
of $800 million.
But two factors soon emerged that might have
prompted Waste Management's board to keep a
closer eye on management. In November 1998, Mr. Drury was diagnosed
with a brain tumor. After surgery to remove it and facing a month of radiation
treatments, he nevertheless said he would "resume normal activities" in a
week.
His doctors' assessments reassured the directors. And they felt they had a
first-rate successor, if needed, in president and chief operating officer,
Rodney R. Proto. At a March 1999 board meeting in Phoenix, the CEO was
"noticeably weaker -- didn't have the cogency," Mr. Whitworth recalls. There
were complications in Mr. Drury's condition.
The second factor, Mr. Whitworth says, was that Messrs. Drury and Proto
"were arrogant. They really treated the board, and Steve, shoddily." Shortly
after the merger, Mr. Whitworth suggested that Mr. Drury prepare brief
monthly updates for the board on the company's progress. According to Mr.
Whitworth, Mr. Drury, the CEO, responded: "Bull. I don't write memos.
They either want a lean operation or a bureaucracy." At other times, Mr.
Whitworth says, Mr. Drury belittled Mr. Miller behind his back. "Steve Miller
was the chairman, and they ignored him," says Mr. Hills.
Mr. Drury, 55, is too ill to be interviewed, says his lawyer, Bill Porter. Mr.
Porter says he isn't familiar enough with events at Waste Management to
speak for Mr. Drury, but adds: "I'm quite confident that John Drury was a
dedicated, hardworking, ethical executive who worked in the interest of
stockholders. I've seen nothing to lead me to believe otherwise."
Mr. Miller says he wasn't personally offended by the way he was treated. The
58-year-old executive, who lives in Oregon and had originally planned on a
year as chairman, decided to step aside early for Mr. Drury, and did so at the
company's annual meeting in May 1999. Given Mr. Drury's health, many of
the directors weren't very happy about that, Mr. Whitworth says. But it was a
done deal.
At the time of the annual meeting, many board members hadn't seen Mr.
Drury in two months. Mr. Proto increasingly was handling day-to-day
operations. Mr. Drury attended the meeting in a wheelchair. "And he looked
terrible," one director remembers. The CEO spoke briefly to shareholders
about his health. Afterward, during a photo opportunity, he had trouble
standing to receive the chairman's gavel from Mr. Miller.
Mr. Miller says he felt uneasy. "But I'd already handed him the gavel," he
recalls. In hindsight, Mr. Miller mocks his own passivity: "Proto's our
successor. Shrug shoulders. Back to Oregon."
Missed Opportunity
Mr. Hills says he was "shocked" when he saw Mr. Drury. "That's when we
should've taken a more aggressive stance," he says. By then, Mr. Hills, 68,
was wrestling with Mr. Drury's management team over control of a mountain
of shareholder lawsuits and an SEC investigation left over from past Waste
Management accounting problems. Mr. Hills took a harder line in dealing with
executives of the old Waste Management than the Drury-Proto team and
some directors thought necessary, and he was beginning to have doubts about
some of the new company's executives.
Mr. Heckmann, the director, who is chairman of U.S.
Filter Corp., says he supported the Drury-Proto team
at the time. "We were from the USA Waste side," he
says. Looking back, he adds, Mr. Hills "was right. He
wasn't getting the right answers. Then he started to
burrow in. He p----- everyone off."
In the months since then, Mr. Hills has come to
conclude that the Drury-Proto team badly overpaid
for some acquisitions before and after the USA
Waste-Waste Management merger. At the time,
however, Wall Street analysts were still upbeat about
the stock, and in mid-June 1999, Mr. Proto,
according to Mr. Miller, informed the board in a letter that it appeared the
company would meet its earnings forecast for the second quarter.
But late on July 6, 1999, the company warned that second-quarter results
would fall short of expectations. More ominously, it conceded that it wasn't
sure why. Its stock plunged 37% the following day.
If the second quarter was so weak, how had Waste Management come
within a penny a share of estimates for the first quarter, typically a weaker
period? For the board, what had been a string of unrelated concerns and
annoyances was fast coming together to shatter its trust in management.
Mr. Whitworth flew to Houston and grilled Mr. Proto and the company's
chief financial officer, Earl D. DeFrates. Had they dressed up the first-quarter
earnings with any undisclosed one-time gains? "It sure looked like it to me,"
Mr. Whitworth says. "But they said no." Mr. DeFrates couldn't be reached
for comment; he was fired by the company in July.
Insider Selling
If the first-quarter earnings had included undisclosed gains, some heavy
insider selling of Waste Management stock in the weeks before the disastrous
second-quarter announcement was going to look very bad. Mr. Proto had
sold 300,000 shares for about $16.5 million. A dozen other insiders reported
selling, too. Mr. Whitworth says he began asking executives he encountered
in the men's room whether they had sold shares. "The first 10 people I asked,
I was batting one thousand," he says. "That was disturbing."
The board, increasingly concerned, named Mr. Whitworth interim chairman.
Mr. Whitworth says one of his first steps was to order Mr. Proto along for a
visit to some field operations. "We were flying from Pittsburgh to Atlanta and
I said, 'Rod, when was the last time you did this?' He said August of 1998.
This was July of 1999. The most operations-intensive period of the company.
Pittsburgh is the biggest division. He had been to Hong Kong, to Italy, to
New Zealand, to Australia, to Latin America twice," in the meantime, Mr.
Whitworth says. "That's when the whole lore of 'the best operator in the
industry' just went out the window."
Mr. Whitworth also kept badgering the financial people about his suspicions
about the first-quarter results. Finally, he says, the company's chief accounting
officer, Bruce Snyder, "started belching out everything." (Mr. Snyder won't
comment.) Says Mr. Whitworth: "I started calling the board members and
saying, 'Look, I don't think Proto survives.' "
The first-quarter results had included a bunch of undisclosed one-time items
and would have to be restated. Now, the insider stock sales definitely looked
bad.
Mr. Proto didn't return phone calls. His lawyer, Gary Lynch of New York,
says, "Rod Proto wouldn't have sold the stock if he thought he had material
nonpublic information." Mr. Lynch wouldn't elaborate.
At an Aug. 13 meeting, the board decided that the ailing Mr. Drury, too, had
to step aside. "It was the toughest assignment of my business career," Mr.
Whitworth says. Mr. Whitworth went to the hotel where Mr. Drury and his
wife, Tanya, were living to deliver the word. "His wife got very upset," Mr.
Whitworth recalls. "She had to leave the room."
Mr. Whitworth says Mr. Drury told him: " 'I knew this was coming. She just
sees it as her personal failure because she was trying to get me better.' "
Later, back at the office, Mr. Whitworth and Mr. Miller, who had returned
from Oregon to serve as acting CEO for the second time, went to fire Mr.
Proto. Mr. Whitworth did the dirty work. Mr. Miller mostly gazed out the
window. Shortly afterward, Mr. Whitworth recalls, one of the company's
finance officials walked up to him and said: " 'By the way, we're taking
delivery of a G-V. We need to make a final payment.' "
Astonished, Messrs. Whitworth and Miller went to the company hangar to
see for themselves. They were pleasantly surprised to find that the new jet
wasn't plastered with corporate logos; the company was able to sell it at a
slight profit, Mr. Whitworth says.
Mr. Miller moved into Mr. Drury's office. On the computer terminal, he says,
he found no e-mail and no business information. "Jeepers. If I was CEO, I'd
want tonnage reports," Mr. Miller says. Waste Management had them, but on
paper.
What Mr. Miller and his colleagues were slow to grasp was that tonnage
reports had become far less important to many trash executives than
stock-price quotes. Since the early 1970s, the formula at publicly traded
garbage companies has been to use stock to buy up smaller, privately held
haulers. Add profits. Boost the stock. Fund more deals.
Actually integrating the operations and running the company efficiently became
a secondary consideration. Industry consolidation pushed up acquisition
prices, making it ever harder to boost profits through deals, without using
some aggressive accounting. At some point, nearly all of the big players
stretched too far to do deals, then ran into earnings shortfalls or other
problems that savaged their stocks. And the pioneers of the practice,
including Mr. Drury, Mr. Buntrock and Mr. Shirvanian, proved not much
better at figuring out when to run for cover than the average investor.
Mr. Shirvanian, the USA Waste director who bought the G-IV, built a
California waste empire from scratch that he later sold to USA Waste. But he
hung on to his shares in the new Waste Management. Once valued at $500
million, they have since plunged by about 75%. (Waste Management's woes
have carved $27 billion from its market capitalization since May 1999.) Mr.
Shirvanian's G-IV was finally delivered a few weeks ago. "Financially, I don't
know if I can afford it," he says. "I'm looking for a partner."
Mr. Buntrock, too, despite his warnings about the merger, kept about a third
of his two million shares. In August, Mr. Buntrock, 68, flew down to Houston
in August to have breakfast with Messrs. Whitworth and Miller. "A lot of it
was to tell Miller, 'I told you so,' " Mr. Whitworth says. To their surprise, Mr.
Buntrock urged the two executives to rehire much of the old Waste
Management executive team that had been purged.
Daily Meetings
No thanks, they told him. In mid-August, Mr. Whitworth began holding daily
meetings to try to sort out the books. Each Waste Management operating
location, a hauling yard or a dump, has its own controller. Mr. Whitworth
asked how many controllers there were. First he was told between 350 and
400. A few days later, it was 500. Ultimately, 600.
He asked the controllers how long it would take to bring their books up to
date. Some said as many as 400 hours.
That's when Waste Management decided to bring in 1,160 outside auditors
from Arthur Andersen LLP and from the company's internal audit contractor,
PricewaterhouseCoopers LLP. To avoid having rookies assigned to the case,
Mr. Whitworth says he made both firms "give me the name, experience level
and qualifications of everyone they assigned."
But with business booming, where were the firms going to find 1,160 available
auditors? The 43rd floor of the office building housing Waste Management
was turned into a giant bullpen for consultants and contractors. One day, Mr.
Whitworth rode the elevator up to 43 and, he says, spotted a sign: "Arthur
Andersen New Hires." And "it showed an arrow," he recalls. "They were out
on the street hiring people and sending them to Waste Management." The tab
for the 1,160 workers was about $3 million a day, Mr. Hills says.
An Arthur Andersen spokesman, Matt Gonring, says fewer than 100 of the
550 people the firm assigned to the job were new hires. He says the sign
read: "New People This Way." PricewaterhouseCoopers says it hasn't
received any complaints from Waste Management.
As the numbers came in -- $211 million in uncollectible bills; $305 million in
unrecorded expenses; $226 million for "hundreds of little things," Mr.
Whitworth says -- the charge the company would eventually take in its third
quarter for accounting irregularities and other problems rose to $1.76 billion,
pretax.
It was time to hire another full-time CEO. The job wasn't getting any more
attractive. One candidate, David Cote, then head of General Electric Co.'s
appliance unit, wanted assurances he could move the company out of
Houston. So Messrs. Whitworth and Miller offered the job to the other
contender, A. Maurice Myers, CEO of trucking company Yellow Corp.
Perhaps he could make the trash trucks run on time.
The three directors think they have Waste Management in the right hands
now, although Wall Street, burned so badly the last time it heard that, remains
wary. Monday, the company's shares fell 25 cents to $15 in 4 p.m. New
York Stock Exchange composite trading. Mr. Hills has added a new
mountain of litigation, and a related SEC investigation, to the stuff he was
already handling. One new lawsuit is Mr. Buntrock's: On Feb. 22, he sued the
company, Mr. Hills and Mr. Miller. He blamed the two directors for
mismanaging the company and demanded about $12 million he says he is
owed in pension money.
Mr. Whitworth is busy trying to sell Waste Management's international
operations and some other assets. He is hoping people remember that the
three directors didn't run from trouble. As for Mr. Miller, though he is still
consulted at times by the others, he has taken another corporate fix-it job with
Reliance Group Holdings. He arrived at the New York insurer after trouble
hit, so he says he has no emotional investment there.
"That I regard as my great strength," Mr. Miller says. "The distinguishing
characteristic of Waste Management is that I believed in it and promoted it." |
