[GRRN] Solid Waste Consolidation

RecycleWorlds (anderson@msn.fullfeed.com)
Wed, 14 Apr 1999 16:17:42 -0500

Gary wrote that: "If WMI, Allied and other multinationals have to get
30-35% ROI to be
"profitable" for Wall Street, and independents would be satisfied with
10-15%, then there seems to be a huge opportunity for independents to

At the risk of sounding like a card carrying 'conomist: Yes and no.
For one thing, the better measure of Wall Street's demands for premium
valuation of a firm's stock is growth in earnings over the prior year.
Earnings growth, in turn, can derive from improved profitability (i.e. by
greater efficiencies, higher sales...monopoly pricing) in the core
business. Alternatively, earnings growth can be punched up via acquisitions
when they are booked as "pooling of interest" accounting (the premium paid
in good will to takeover the company is amortized or spread over 40 years
while the revenues from the acquired firm is recorded currently). As was
laid out in a devastating way in a 1990 article in Barons by Abe Briloff,
this is effectively little more than an old fashioned ponzi scheme, a fact
which caused Waste Management's stock to tank less than 6 months after the
article appeared. That means that the Street's targets can be met in other
ways than premium pricing in a hauler's recycling bids, i.e. by ramping up
the acquisitions strategy.

For another, one of the advantages of their national breadth is the
ability to price discriminate ... i.e. levy monopoly rents in cities
without competition, and predatory prices in competitive markets where
Gary's pesky entrepreneurs raise their ugly head.

Not that we shouldn't go for it and twist and turn every option to
maximize the opportunity. It's just that the first priority needs to be to
address monopoly power in order to restore competitive conditions. Absent
that, it will be a very lonely, uphill fight against an opponent with
seemingly limitless resources to...what was BFI's phrase a few years ago in
New Hampshire in a revelatory comment that cost them a $13 million
settlement, "to squish you like a bug".


Peter Anderson
RecycleWorlds Consulting
4513 Vernon Blvd. Ste. 15
Madison, WI 53705-4964
Phone:(608) 231-1100/Fax: (608) 233-0011