September/October 1994
Is there a business solution to high fixed costs, evaporating credit, asphyxiating margins, and expensive regulatory obligations? A group of Phoenix-area firms say they found one when they joined forces to become one stronger company.
By Jeff Borsecnik
Jeff Borsecnik is an associate editor of Scrap Processing and Recycling.
Get the presidents of a couple of competing local scrap companies together for a mutual gripe session over high operating costs and the talk may turn to merger.
At least that’s what happened one day in 1992 when the heads of two Phoenix firms, Ellis Rubenstein of Empire Metals Inc. and David Zack of Copperstate Metals Inc. began to nonchalantly chat about their woes in the then-declining market. As it turned out, the two shared many of the same problems, and both suspected solutions could be found in industry consolidation--merging firms to take advantage of economies of scale while pooling resources.
Within several months, that conversation led to a deal in principle and, less than a year later, in May 1993, to the creation of EMCO Inc. (The name is a play on EMpire plus COpperstate.) Then, practically before the paint was dry on the EMCO signs, the company expanded by absorbing a third local scrap firm, Valley Steel and Supply Co. (Tempe, Ariz.). The result is the largest recycling company in Arizona.
Similar Problems, Similar Promise
You might say Phoenix has more scrap recyclers than scrap. Before EMCO gelled, there were about nine small-to-medium-sized processing firms (three with automobile shredders) serving this area with a limited manufacturing base. Adding to this competitive situation, Phoenix is close enough to several larger metropolitan areas to attract outside scrap purchasing rivals. "Basically, the market was diluted to the point where no one was making any money," says Barry Fleet, EMCO's purchasing director, who joined Empire a few months before the merger. (Fleet had also previously worked for Valley Steel and Supply.)
Besides this common market backdrop, Copperstate and Empire were alike in other ways. Both, for instance, were family-owned businesses that had operated in the Phoenix area for more than 20 years. And both had had their ups and downs, experiencing substantial growth but also "growing pains," as Zack puts it pointing to too-fast growth with insufficient cash. This chronic problem turned acute with the eruption of the Charles Keating savings@ and-16an debacle, which prompted many Arizona financial institutions to scurry and call in all but their most-watertight loans, Empire and Copperstate's banks "pulled the plug," says Rubenstein, forcing both companies to seek Chapter 11 bankruptcy protection.
Toss in the poor scrap markets both firms had to cope with, along with underutilized equipment and concerns about growing regulatory burdens, and the result was a group of recyclers looking for-perhaps desperate for some new answers. They turned to each other.
The idea of seeking a stronger market position via some sort of consolidation was not new to Copperstate. In the late 1980s, the company had approached two other Arizona scrap dealers looking to make a match, but one refused to share certain data when it came time to make a deal, and the other died before an arrangement was finalized. In the years that followed, Copperstate's tenuous financial situation, accentuated by declining commodity markets, added urgency to the consolidation prospect.
Meanwhile, Empire Metals was struggling with its future and sold off a waste hauling operation in an effort to refocus on its core business. The investors who helped the firm put together that deal suggested consolidation might hold solutions to Empire's problems, which included insufficient credit as well as a lack of skilled upper-level managers beyond Rubenstein and his father, Harold.
Empire and Copperstate seemed natural partners. The two businesses had traded metal over the years, with Empire selling shreddable ferrous to Copperstate and nonferrous material often moving in the other direction. These different commodity focuses would complement each other, and each firm appeared likely to benefit from the other's operations expertise, market knowledge, and business contacts in specific segments. And, despite having had "a recent bit of a falling out," says Rubenstein, they trusted each other and shared similar backgrounds and business philosophies. •
Is there a business solution to high fixed costs, evaporating credit, asphyxiating margins, and expensive regulatory obligations? A group of Phoenix-area firms say they found one when they joined forces to become one stronger company.