Sometimes, so the saying goes, our success contains the seeds of our destruction. At other times, a phoenix is born out of the ashes. Both have proven to be the case in the scrap industry.
The success of entrepreneurs who built their companies—or companies founded by their fathers or grandfathers—attracts the attention of larger companies, and they see control being wrested away from them. The question is what to do next.
Some receive a financial offer too good to refuse. For others, the offer comes at a time when they are ready to bail out the business is strong, there are no heirs to take over the reins and they are lured by year-round warm weather in Florida.
Some are only too happy to pack it in and leave. Others stay on for a while and work as an employee where once they were an owner. Some chafe under the rules of the corporate world, and within a year or two they are no longer employed by the company started by their impoverished immigrant grandfathers and built into a powerful business.
For some this is fine; they agree to teach the business to others. For others, it is a change demonstrating that "their" company is no longer the entrepreneurial family owned and operated company they grew up with and helped to build.
Some are content to accept this fate. They made the choice to yield the power and decision-making when they sold the company. Others aren't quite ready to toss in the towel, though. They sit quietly and observe the noncompete rules spelled out in their severance agreement—and wait.
They may not say it, but starting up a new yard and building it into a competitor is front and center in their minds. I can think of perhaps a half-dozen such industry members; I won't name them, but most know who they are. And better than that, they know their goals and how to achieve them.
A few of these displaced entrepreneurs were at the Institute of Scrap Recycling Industries annual convention in San Diego. They did not go away quietly, as some might have hoped. They are ready for new challenges. They also serve as a dramatic counterpoint to the wannabe entrepreneurs who leapt into the scrap business in the 1990s.
Armed with money from lenders on Wall Street, these players bought up one scrapyard after another. As I recall, the main goal of one was to buy only scrapyards with shredders. No consideration was given to whether it would have enough junked vehicles and appliances to feed those shredders. When that strategy failed, it shifted to buying up scrapyards in one region.
In truth, it was a house of cards built with other people's money and it collapsed on itself.Companies that started buying binges in 1995 and 1996 were on life support by 1998.
One, Recycling Industries, simply folded up and its yards were shut down or sold back to the original owners by the bankruptcy court. Philip Services Corp. had two trips through bankruptcy court and is doing well these days. Metal Management Inc. was in bankruptcy as well, but many of the yards that made up its corporate family were the cream of the crop. It has survived and thrived, and is now known as Sims Metal Management, having merged with Australia-based Sims Group.
More often, though, success in the scrap business is measured in slow, steady progress. One now-retired scrap entrepreneur liked to boast that he arrived in the South aboard a train after World War II with $40 or $50 in his pocket and set out to make his mark in the scrap business. He did.
The details of his life are unique, but there are many similar biographies in the scrap business. Some worked by themselves or for another company before they saw an opportunity and pursued it. Some failed and went back to work for another company. Others were favored by the growth of industries like the steel mini-mills and their dependence on scrap to make finished steel products. Others were able to build their businesses under less-favorable circumstances but succeeded nevertheless.
That success turned what was sometimes a bonanza-or-bust business like scrap processing into a high-tech link in the metals supply network. It was inevitable that some would be deemed takeover targets by steel companies anxious to gain more control over their raw materials. They went from being scrapyards to commodity suppliers, and it was not long before their customers longed to control them.
None of this is new to the steel industry, or other manufacturing industries for that matter. The big integrated steelmakers of the past bought up coal and iron ore mines. Auto assemblers learned to make cast iron motor blocks or bought the foundries that knew how to pour the metal and machine them.
Now, some mini-mills have scooped up the most desirable scrap suppliers to make certain they have an assured supply of scrap. It's not a simple make-or-buy decision; it's more a question of survival.
These acquisitions might seem like the hallmarks of a mature industry where there is little room for new entrants. But don't tell that to any of those displaced entrepreneurs anxious to get back in the game. They might just prove you wrong.