Browning-Ferris Industries, Inc. History

Address:

757 North Eldridge
Houston, Texas 77079
U.S.A.

Telephone: (281) 870-7632
Fax: (713) 870-7844

Public Company
Incorporated: 1970
Employees: 37,000
Sales: $5.77 billion (1996)
Stock Exchanges: New York Midwest Pacific London
SICs: 4953 Refuse Systems; 5093 Scrap & Waste Materials; 8748 Business Consulting Services, Not Elsewhere Classified

Company History:

The second-largest waste disposal company in the world, Browning-Ferris Industries, Inc. (BFI) collects, processes, disposes, and recycles solid waste for commercial, industrial, and residential customers. From a one-truck operation established in Houston, Texas, in 1966, BFI grew with phenomenal speed into the waste industry's second-largest corporation, active throughout the United States and in international markets as well. Like its bigger rival, Waste Management, BFI offered a full range of waste, recycling, and sanitation services. During the late 1990s, BFI operated in nearly 800 locations in Asia, Australia, Europe, the Middle East, New Zealand, and North America. The company's North American operations included 104 solid-waste landfill sites, 32 medical-waste treatment facilities, and 125 recycling facilities.

1960s Origins

Browning-Ferris's extremely rapid growth was made possible by the wholesale change that overtook the waste-disposal industry in the 1960s. Prior to that time, waste was known as garbage, and usually was transported by municipalities or small local collection firms to a distant plot of land and there dumped or incinerated. Regulations were few and the industry was completely fragmented, a typical company consisting of no more than a few trucks and the family that owned them.

This was the situation in Houston in 1964 when a young accountant named Tom Fatjo Jr. began keeping financial records for a number of local garbage collectors. Fatjo became intrigued with the wide-open business, and in 1966 bought a truck and opened his own garbage collection company, one of the 17 small firms at that time working in the Houston area. At the time, national legislation designed to tighten regulation of both collection and disposal services had recently been enacted. This legislation would change radically the nature of garbage treatment in the United States. Henceforth, collection trucks would have to meet higher standards of sanitation, while for reasons of air pollution the incineration of garbage would give way increasingly to landfill burial. Both changes would require large capital investments on the part of waste operators, most of whom were in no position to raise the sums involved. The situation was ripe for the creation of a large, multi-city company capable of spending the money needed to establish the garbage business as a modern, sanitary, technologically competent industry. The days of one-horse garbage hauling were over.

Tom Fatjo accordingly began looking for ways to expand his Houston company. After beginning with residential waste collection, he added accounts in the commercial and industrial sectors such as shopping malls and small factories. In 1968 he branched into the disposal end of the business, winning a large landfill contract from the city of Houston. At about this time Fatjo, his eyes trained on a much larger, regional organization, became partners with Louis A. Waters, then a vice president of corporate finance for a New York securities brokerage. The two of them decided to embark on a program of acquisitions designed to weld together scores of the tiny collection and disposal companies operating across Texas and the South. To help raise the capital needed for so ambitious an undertaking, Fatjo and Waters in 1969 gained control of Browning-Ferris Machinery Company, a publicly traded manufacturer of garbage trucks and landfill equipment, among other things. Not only did Browning-Ferris offer an obvious match for the two partners' collection business, it also allowed them to issue stock for the purposes of working capital and equity swaps.

Thus fortified, Fatjo and Waters went to work over the next three years buying up small operators at the rate of one a week. By consolidating its acquisitions, most of which were in Houston; Memphis, Tennessee; and Puerto Rico, Browning-Ferris, renamed Browning-Ferris Industries, Inc., was able to take advantage of the basic axiom of the collection business: the more adjacent stops made by each truck, the greater the return on equity. It is much more profitable to collect waste, for example, from ten large apartment complexes in a row than to collect from the first, fifth, and tenth buildings and then be forced to move elsewhere for the next pickup. Therefore, as BFI bought up the businesses of rival collectors in Houston or Memphis, its costs per customer dropped sharply and profits accordingly rose, paving the way for further acquisitions. In the meantime, growing public pressure for environmental protection prompted a continuing flurry of new regulations affecting every aspect of the waste industry. Compliance with such legislation was expensive, in terms of either equipment or knowhow, which in turn made it easier for BFI to buy out financially strapped, smaller competitors. BFI bought out competitors as fast as the contracts could be written. Most owners of the acquired companies stayed on as managers.

By 1975 BFI's revenues had climbed to $256 million. The company operated 2,800 trucks in 131 different cities, employed 7,700 workers, and had accumulated 60 landfills. The latter would prove critically important, as further regulation and public anxiety made it nearly impossible to create new landfills and raised the costs of operating those already in existence. Dumping charges skyrocketed, adding a new source of bottom-line funds to BFI's resources; more importantly, the scarcity of landfill sites discouraged new competitors from jumping into the business. Those companies such as BFI and Waste Management that got into garbage early, stayed in and grew at prodigious rates; those that came later found the industry nearly locked up. BFI expanded its landfill holdings whenever possible, and also began handling a new form of waste variously labeled as chemical, toxic, or hazardous. Although toxic waste would later play an important role in BFI's history, in the mid-1970s the company had just begun to explore the complex and notoriously litigious field, chiefly in the form of waste-oil treatment.

In 1976 Tom Fatjo withdrew from BFI to run an investment company of his own, leaving Louis Waters in charge of the firm's finances and Harry Phillips, Sr. as its chief operating officer. Phillips had owned a number of the garbage collection companies in Memphis acquired by BFI, and his hands-on experience made him invaluable to the company's founders, neither of whom knew intimately the day-to-day problems of the garbage business. Phillips remained chief operating officer and served as chairman from 1979 until the appointment of William D. Ruckelshaus in 1988, and even then continued as chairman of the executive committee.

1970s: Diversification and Expansion

Aside from its core business in solid waste, by the mid-1970s BFI had developed a number of peripheral interests. It was one of the earliest companies to experiment with the recycling of paper waste, using its own collection supply and also buying paper from thousands of users that could then be treated, shredded, and sold to papermakers. A sharp recession in the paper markets in 1975 threw BFI's paper division into the red, however, and in the following year its paper recycling assets were spun off to shareholders in the form of a separate company. Of greater importance was BFI's first foreign contract, a 1973 agreement to provide sanitation services in parts of Spain. The business of international waste services grew rapidly during the 1970s, particularly after rival Waste Management signed a contract in 1975 to clean the city of Riyadh, Saudi Arabia, for five years, and it seems that despite its early success in Spain, BFI was generally slow to pursue the many opportunities overseas. As a result, Waste Management won most of the lucrative international contracts, while BFI only established its presence in Europe and the Far East markets in later years, winning the Riyadh contract back from Waste Management in the next round.

Harry Phillips proved to be an outstanding leader for BFI. His background in operations enabled him to keep a tight lid on costs even as the company continued to expand at breakneck speed through the early years of the 1980s. Thus, not only did BFI's revenue double between 1978 and 1983 to $843 million, its operating margin also increased dramatically, from just under 31 percent to 35.8 percent. The latter was due to BFI's economies of scale, by which a greater number of pick-ups translated into a larger bottom line; to a large and highly motivated sales force expected to bring in scores of new customers every year; and to Phillips's ability to coordinate the day-to-day complexities of a rapidly growing corporation.

It was also during this period that chemical and toxic waste became a more important factor at BFI. In 1976 Congress passed the Resource Conservation and Recovery Act, a piece of legislation designed to tighten control of all forms of potentially dangerous landfills. By the time the law was fully implemented in 1980 it had sharply increased the difficulty and cost of chemical and toxic disposal, giving much additional business to companies like BFI with some experience in the field. By 1983 chemical waste provided 10 percent of BFI's revenue and was projected to be a mainstay of the company's future, as it became more difficult to find opportunities for expansion in the solid-waste sector. About half of the company's toxic-waste business was the result of the 1983 purchase of CECOS International Inc., one of the industry's leaders, along with the smaller Newco Waste Systems. The CECOS acquisition brought with it two toxic disposal sites--giving BFI a total of eight--and opened up the important New York and Ohio markets. With the Environmental Protection Agency (EPA) about to begin distributing billions of dollars from its Superfund to clean up toxic waste, and BFI's 400-person sales force aggressively on the march, the company had every reason to expect hazardous disposal to become a second major revenue stream.

Difficulties During the 1980s

As it turned out, however, it was primarily those two elements that caused BFI much grief during the next five years. BFI's sales force was not only large and aggressive, rival firms and a number of grand juries alleged, it also engaged in predatory pricing. As of 1984 the company was under investigation in seven states for suspected monopolistic practices such as price-fixing, charges that it denied but often settled out of court for amounts totaling $15 million by 1989. The monetary damages were relatively minor, but such publicity hurt the company's image with customers and with the increasing group of governmental, environmental, and industrial parties involved. The problem was intensified in 1985, when a BFI toxic dump in Williamsburg, Ohio, was repeatedly closed by both state and federal environmental authorities. A grand jury also brought criminal charges against BFI, claiming the company had contaminated a nearby creek. Amid the attendant turmoil, BFI's hazardous division as a whole dropped into the red for the first half of the year.

While the company's solid-waste business continued to grow profitably and its first few waste-to-energy plants opened in New York and New Jersey, the comparatively minor hazardous-waste division became a major liability. Company-owned toxic landfills in New York, Ohio, and Louisiana were found wanting when BFI applied for permit extensions near the end of the 1980s.

Concerned that the company might be permanently shut out of these three sites, and generally in need of a face-lift, BFI in October 1988 announced that it had hired William D. Ruckelshaus as its new chairman and chief executive. Ruckelshaus brought with him a reputation for integrity, first established during the Watergate scandal when as deputy attorney general he refused President Richard Nixon's order to fire special prosecutor Archibald Cox and later burnished by his second term as head of the EPA following the scandalous reign of Anne Gorsuch Burford in the early 1980s. Ruckelshaus was respected by the business community, environmentalists, and public servants, and it was thought that he could salvage BFI's hazardous-waste contracts.

1990s: Recycling and Revival

Ruckelshaus was very much an outsider at BFI, however, and his arrival as the company's chairman struck observers as a public relations ploy. The company's relationship with the federal and state environmental agencies was strained beyond the point of immediate repair, and despite the presence of Ruckelshaus, BFI was unable to win approval for any of the three dumps in question. BFI announced in the spring of 1990 that it was withdrawing from the toxic-waste business, citing poor profit margins as the source of its decision. The company took a $452 million pre-tax charge against earnings to cover the cost of devalued assets, pushing fiscal 1990 into the red and sending a clear signal that in the battle between BFI and Waste Management for the industry's top spot, BFI would at least temporarily settle for second. Despite the legal liabilities inherent in toxic waste, the field is extremely profitable and is certain to grow indefinitely; in the year of BFI's withdrawal, for example, Waste Management earned $176 million in that segment of its business.

Once BFI exited the hazardous waste business, Ruckelshaus led the push toward recovery by focusing on what he called "managing the middle." His objective was to reduce operating costs wherever he could, and in this effort Ruckelshaus left no stone unturned. In addition to slashing the maintenance costs associated with operating the company's fleet of bulldozers, trucks, and other equipment, Ruckelshaus made smaller and less obvious cuts, including the doughnuts served at staff meetings and his own airline ticket expenses. Although the savings realized by flying coach rather than first class amounted to little for a multi-billion dollar corporation like BFI, the across-the-board overhead reductions added up, enabling the company to trim operating costs by nearly 15 percent in a few short years. Further profit gains were made by acquiring landfills, thereby improving operating margins by avoiding third-party landfill fees.

Productivity and efficiency improved in the wake of these measures by Ruckelshaus, giving him the power to move in the direction he perceived BFI should take in the future. From Ruckelshaus's vantage point, BFI's best chance for long-term financial health was in recycling, but few at BFI shared his view. "Ruckleshaus brought the vision of recycling with him," Harry Phillips related to Forbes magazine. "Most of us who had been in the business took a dim view of it." Despite his detractors, Ruckelshaus moved headlong into recycling, resolving to concentrate on paper, which accounted for 45 percent of the U.S. waste stream and soon would represent 85 percent of BFI's recycling business. By receiving a fee for collecting waste paper, sorting and baling it and then reselling it directly to papermakers, BFI gained a new, powerful, revenue-generating engine, one that drove sales upward at an encouraging rate and provided great promise for the future. BFI's recycling division recorded less than $10 million in 1990; by 1995 the company's recycling efforts were bringing in $675 million annually.

Increased operational efficiency coupled with a focus on recycling proved to be the restorative financial salve BFI needed to rebound from the massive loss in 1990. After overhead costs had been reduced and the foray into recycling began in earnest, BFI mirrored the strategy employed during its inaugural years of business by executing an ambitious acquisition spree. In 1993, as the regulatory environment in the waste-disposal industry made it increasingly difficult for smaller companies to survive, BFI swallowed up many of its more diminutive competitors, spending nearly $140 million to acquire more than 100 companies. The following year, when sales eclipsed $4 billion, BFI acquired 115 companies, including a 50 percent interest in Otto Waste Services, a German solid waste services company, for $375 million. The pace of expansion slackened only marginally in 1995 when BFI added $267 million in revenues through the purchase of 103 companies.

The actions taken by BFI during the first half of the 1990s pointed to the direction it would take during the second half of the decade and most likely into the foreseeable future. Recycling, which accounted for 11 percent of the company's total revenue volume midway through the decade and was growing exponentially, was expected to account for 35 percent of BFI's revenue total by the beginning of the 21st century. Likewise, further progress was expected to be made on the acquisition front, as BFI pursued the waste-disposal industry's smaller competitors. Acquisitions and recycling, accordingly, represented the operative words describing BFI's future in the massive and increasingly important business of waste disposal.

Principal Subsidiaries: A.B.C. Disposal, Inc.; Atkinson Enterprises, Inc.; CECOS International, Inc.; Cotecnica, C.A.; Dave Systems, Inc.; Dooley Equipment Corp.; Eastern Disposal Inc.; Empire Sweeping Co.; Empresa Nacional de Residuos Ltd.; Environmental Equipment Corp.; ESI, Inc.; Geneva Waste Services, Inc.; Heavy Equipment Leasing Services Co., Inc.; Hennepin Transfer, Inc.; HL-NIW, Inc.; Indoco, Inc.; International Disposal Corp.; Joe Ball Sanitation Service, Inc.; Land Reclamation, Inc.; Landfill, Inc.; Lanham Waste Control, Inc.; Louis Kmito & Son, Inc.; Lyon Development Co.; Multi-Packer Inc.; National Disposal Service, Inc.; Newco Waste Systems, Inc.; Pine Bend Landfill, Inc.; Prince William Trash Service, Inc.; Removal, Inc.; Residential Service, Inc.; Risk Services, Inc.; Rot's Disposal Service, Inc.; Servicos Metropolitanos, C.A.; Waste Disposal, Inc.; West Roxbury Crushed Stone Co.; Westowns Disposal Systems, Inc.; Woodlake Sanitary Service, Inc.

Browning-Ferris Industries, Inc. History

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