Restructuring at WMX Technologies
Beware the egos of activist shareholders. Phillip Rooney, chief executive of WMX Technologies, ignored that advice and despite the backing of his entire board, resigned in February after only eight months in office.
True, WMX shareholders had plenty to complain about. Last year, for example, the company's return on equity was a mere 3.6 percent. Moreover, for the last few years WMX's stock has been lagging far behind the Dow Jones Industrial Average and the S&P 500. It has even been lagging the average for other waste management companies.
WMX, the nation's biggest waste management concern, has 11mn residential and 1 mn commercial customers. The company's total sales are about $10 bn a year. It also provides street sweeping, parking lot cleaning, and environmental services.
However the dissident shareholders have been urging WMX to rid itself of everything but its core business. To assuage dissident shareholders, such as the Soros group, which owns a bit more than 5 percent of WMX shares, and Lens Inc, the activist institutional investor, Rooney submitted a plan at the beginning of February that would restructure the company in an attempt to drive up market value.
The market didn't like the plan on the whole, or an announced fourth quarter loss and predicted earnings shortfall for 1997. WMX stock plunged $31/8 to close at $33, a loss of 9 percent on the day it was announced. Still, even critics agreed that it was a step in the right direction.
Waste Not Want Not
Under the plan, which is currently in effect, WMX would sell off non-core assets and use the funds to buy out third party investors in WMX subsidiaries that were part of its core business. Cash would then also be devoted to buying back some of WMX's own stock from the public.
But some investors were disturbed by other problems in addition to those involving the strategic plan. Nell Minow of Lens was particularly upset about a $91 mn judgment against the company last December. The judgment determined that WMX had juggled the numbers to reduce royalty payments to former owners of a landfill that WMX bought in 1978.
'I've been very deeply concerned about the $91 mn fraud judgment,' says Minow. 'I feel that the board was not active enough. The judgment said that they bought a garbage utility from some people and agreed to give those people a percentage of the profits from the facility, and then they cooked the books,' she claims.
Bruce Tobecksen, WMX's vice president for finance, said in an interview that the case was a complex commercial issue and that WMX was appealing the decision.
When asked why she was so concerned about an event that happened some 20 years ago, Minow says that the company still 'has the same managers.' And she says that she has heard rumors that WMX is behaving similarly in other cases. She requested that WMX start a full-fledged investigation into how the company is managed. So far at least, WMX has made no public comment on her request.
All in a Snit
The managers Minow refers to are Rooney, who joined the company in 1968, a year after it was founded, and Dean Buntrock, the founder who continues as chairman. Buntrock stepped down as CEO last year, handing the reins to Rooney. So Rooney was CEO for just eight months before resigning under pressure in mid-February.
In a statement, Rooney said he agreed to quit to avoid a proxy fight that would be damaging to the company.
And that leads to WMX and Rooney's biggest nemesis - the Soros group and its holding in the Oak Brook, Illinois-based company. According to sources close to the talks between dissident shareholders and management, Soros's people were infuriated at a meeting when Rooney embarrassed the Soros representatives by telling them in front of other big investors that 'he didn't have to listen to them.'
More than that, some sources claim that Rooney blatantly lied to the Soros people and other investors by indicating that James Koenig, who then was chief financial officer, would leave the company. But, in truth, he wasn't fired, but was given a new job as senior vice president and president of WMX's shared services organization.'
The rumored insult may be the reason Soros kept the pressure on Rooney rather than on Buntrock. One might have expected Soros to be harder on Buntrock, who had run the company for 29 years, than on Rooney, who only had the CEO job for less than a year. Instead, Buntrock was made interim CEO.
'We do believe that the company is on the right track,' says Shawn Pattison, an official with the Soros group. 'We were not commenting on the plan, we were commenting on management.'
Sort of Straightjacket
So, was Rooney fired just because he wasn't deferential enough to the Soros people? A case could be made that there was more to it than that.
WMX has been trying to improve its cashflow, and Rooney was under personal pressure to do so because much of his bonus depended on improvement in this area. His base annual salary was $1.25 mn; under the bonus plans, that could be tripled. And Rooney had not been shy about taking bonuses in years past even though the company was performing poorly.
The board's compensation committee, according to the 1996 proxy statement, determined that WMX performed too poorly compared with a group of similar companies to give any profit-sharing bonus to Rooney or Buntrock.
The committee noted that WMX's one-year and three-year return on assets and its one-year return on equity placed it below the Comparator Companies' 50th percentile (Comparator is a consultant on compensation). 'The compensation committee was also aware that the company's share price continued to underperform the broad stock market indices,' the proxy continues.
Yet, what did the committee do? It decided that because WMX met its cashflow goals, it would award a bonus to both Rooney and Buntrock. Buntrock refused to accept the prize, while Rooney pocketed it. A dissident shareholder pointed out that the increased cashflow didn't reflect better management, just the sale of assets.
The willingness of the board's compensation committee to figure out how to give even a partial bonus to management despite the company's poor performance is why the dissidents are seeking a board that is not too closely aligned with management, according to a dissident.
In its filing with the SEC last December, Soros not only requested Rooney's ouster, but it also sought to nominate two directors to the WMX board. Following the departure of Rooney, Soros agreed to remove its slate of directors.
About the same time that Rooney quit, WMX agreed to sell its stake in ServiceMaster back to the company at 10 percent below the market price. As a result, it netted some $626 mn rather than the market price of about $700 mn. WMX acquired the ServiceMaster stock and options in 1990 in return for ceding its TruGreen lawn care unit for an 18.7 percent stake in ServiceMaster.
Did the agreement make sense from WMX's perspective, and would it have helped Rooney get another big bonus for improved liquidity?
According to WMX's Tobeckson, the company made a nominal profit on the deal, amounting to about a penny a share. The 1.8 mn options that WMX surrendered would have allowed it to purchase shares at $22. At the time of the deal, they were worth $26. That would be a $7.2 mn giveaway.
Not only did the deal raise cash, but it also was a substantial step toward meeting investor requests that WMX should strip itself to the core, shedding activities that are unrelated to its main waste management business. Analysts say that the deal was positive for WMX, whether or not it would have helped Rooney get his bonus. First, it raised $626 mn in cash that could be used to acquire full ownership of core-based businesses. Next, under the terms of the agreement with ServiceMaster, WMX was prohibited from selling the stock on the open market until the end of 1997. And even if legally it could, selling 27 mn shares would have knocked the bottom out of the stock's market, forcing down the price so that WMX probably would have reaped a lot less than the $626 mn it got from its deal with ServiceMaster.
Anyway, Rooney's departure came a day or two before the announcement of the ServiceMaster deal. Whether deserved or not, the market cheered at the news of Rooney's departure. In sharp contrast to the market's reaction when he announced his restructuring plan, WMX's stock soared 5.3 percent - to $34.625 - on the day his departure was made public.
Some analysts, who asked not to be identified, believe that Rooney was the great hope for WMX. They say that he knows the company well, knows the industry inside out and would have been the person best able to make the necessary changes. It seems he made the unforgivable error of not being nice enough to his bosses, those powerful minority shareholders.
Feeling the Crunch
What's it like inside a garbage compactor? If anyone knows the answer to that, it's WMX Technologies. High pitched shareholder pressure has lately been squeezing the company into a leaner, meaner, more compact package.
After years of acquisitions to turn itself into a global conglomerate, WMX recently faced major investors clamoring for $4 bn in non-core sell-offs by 1998. What was it to do? First it sold off pieces of Rust International, Wessex Water and most of its medical waste business. With about $1 bn in cash raised it then started repurchasing shares.
But the stock price wouldn't budge. So finally WMX decided to go back to being the garbage company it was in the first place. In February it launched a two-year plan to sell off another $1.5 bn in assets and cut 3,000 jobs. WMX assured investors they would end up with a domestic waste management player in markets where it is either number one or two - much like the old Waste Management Inc, the name it discarded in 1993 and that it is now resuming again.
By May, WMX had sold its ServiceMaster stake, unloaded most of its Canadian operations to USA Waste Services and completed a $1 bn 'Dutch auction' buy-back of shares, although a $350 mn buy-back of Wheelabrator was canceled. Now the company is hunting for a new CEO, with chairman and acting CEO Dean Buntrock promising to step down when a replacement is found.