Waste Management Kept Its Options Open During Merger Talks Company Interviewed Ceo Candidates While Discussing Merger

Until the very end, Waste Management Inc. hedged its bets. All the while it was talking quietly to USA Waste Services Inc. about a merger, it was talking to candidates to take over as chairman and chief executive officer.

The goal for Waste Management’s board, struggling with financial problems and executive turnover, was to have a choice, said spokesman William Plunkett.

“The company had two courses of action - to remain independent and find a new CEO and build shareholder value that way, or to enter into a strategic merger,” he said. “The board left open its options to pursue a merger or a new CEO candidate.”

Both options were considered seriously, said Plunkett and another source who was involved personally in the search.

In fact, the source said, having potential CEOs on tap probably helped Waste Management negotiate a better deal.

Waste Management, the nation’s largest trash-hauling company, said last week it would merge with Houston-based USA Waste, the third-largest. Waste Management stockholders will swap each of their shares for 0.725 shares of USA Waste.

On Thursday, USA Waste shares closed at $45, up $2, on the New York Stock Exchange. Using the merger formula, that would value Waste Management shares at $32.62. Waste Management closed at $30.56, up $1.25.

The merged company also will assume Waste Management’s $7 billion in debt, putting the deal’s total value at $21.85 billion. That makes it the biggest merger ever involving a Chicago-area company, topping the roughly $13 billion takeover of Kraft Inc. by Philip Morris Cos. in 1988.

The combined company will keep the Waste Management name, but will be based in USA Waste’s Houston headquarters. USA Waste’s managers, led by chief executive John Drury, will run the combined company. Waste Management’s interim chairman and chief executive, Robert S. Miller, will be the nonexecutive chairman.

Miller said he and Drury had been talking informally since early November, only days after Miller took the interim leadership at Waste Management. But he said no deal was possible until Waste Management cleared up its financial problems, stemming in part from inaccurate accounting methods.

On Feb. 24, Waste Management reported a $1.18 billion loss for 1997 and restated earnings back to 1992, effectively wiping out more than $1 billion more in past profits.

That done, Miller said, the two companies negotiated a merger agreement in rapid order.

But until that point, the company’s search committee and the Heidrick and Struggles executive recruitment firm continued to consider chief executive officer candidates in case the board decided the merger was a bad idea or an acceptable deal could not be worked out, the source said.

Plunkett said the board “approached the discussions with USA Waste with an open mind.”

In the weeks before the merger decision, Waste Management’s board met with all of USA Waste’s senior managers, Miller said. Plunkett said the board wanted to determine if USA Waste management had “the talent and the skill and the energy to run Waste Management, the merged company.”

If the merger route didn’t win favor, “we had highly qualified candidates available for the board to review,” the source said. “Nobody was willing to commit until they knew what the company was going to look like on an ongoing basis, which is certainly reasonable. If the company is going to restate financial statements, you certainly want to see what that is.”

Though the two companies’ share prices have been rising, analysts said it’s unlikely that terms of the merger will change or that any other suitors will bid for Waste Management.

“It’s hard to think of who else could be a bidder. Only somebody as ambitious as this John Drury fellow would have the guts,” said James N. Kelleher of Argus Research in New York. “There is some real desirable stuff there (at Waste Management), but who else but this guy Drury would want to take on this $7 billion debt?”