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Longshot Bid Hampers Republic/Allied Integration
Waste Management’s pursuit of Republic may serve as a distraction to the target’s ongoing integration plans
August 18, 2008
On June 23, Republic Services and Allied Waste Industries announced a merger. One month later the pair had established an integration team to oversee the marriage and “fully capture the $150 million” in annual synergies the proposed deal is expected to yield. It is exactly the approach consultants and advisers preach whenever two companies combine. What neither side anticipated, however, was an unsolicited, $6.73 billion offer from Waste Management to acquire Republic.
While Republic has twice turned away its new suitor, (the latest rejection coming on August 14), industry pros say the interest from Waste Management at the very least could slow down the integration efforts of Republic and Allied.
“It causes people to delay their plans,” Craig Farlie, a founding partner at boutique investment bank Farlie, Turner & Co., told Mergers & Acquisitions Journal. “Rather than being 100% focused on the merger, [a third-party offer] usually distracts everyone from the task at hand.”
While garbage collection seems to be a fairly straight-forward industry, consolidation is not as easy as some might expect, as past deals in the sector have shown. Waste Management’s 1998 acquisition of USA Waste Services, for example, took years to iron out, but not before a series of earnings shortfalls, executive turnover and accounting issues conspired to weigh down the company.
“Integration is a lot more complex than people may think,” Farlie described, a notion that underscores the importance of getting an early start on the integration process.
A Raymond James analyst note, provided by Thomson One Analytics, supports this thinking, citing that delays could create “the loss of a good esprit de corps at Republic and possible morale issues at Allied.” The solution, the analysts said, “would be to move quickly on management and other changes to limit such damage.”
According to Farlie, that’s exactly what Republic and Allied are doing, even as Waste Management introduces a level of uncertainty into the proceedings. “Based on what I’ve heard, both sides are moving ahead as if the deal is happening,” he said.
Indeed, on Monday, Republic announced that it had already lined up the financing for the proposed deal.
Meanwhile, in July, the two companies said that Michael Cordesman, president and COO of Republic, and Allied’s Christopher Melocik, the senior vice president of operations effectiveness, would lead the merger’s planning process. The two sides, which are being advised by Deloitte Consulting, also created an integration team comprised of 10 people from each company, including Republic chairman and CEO James O’Connor and Allied president and COO Don Slager.
Republic and Allied expect the merger to lead to annual synergies of $150 million within the next three years, with roughly $100 million in savings realized in the first 12 months. The synergies will come from reductions in SG&A and operating costs, with the latter driven by cuts in transportation, procurement and routing costs.
Farlie, however, noted that should Waste Management find a way to strike a deal, the integration efforts would be “markedly different." He estimated, for example, that there would likely be as many as “two to three times” the number of dispositions necessary, and added that a potential Waste Management combination would probably result in more scrutiny from regulators.
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