(FORTUNE Magazine) – Last Oct. 31, just three months into his tenure as CEO of Waste Management, the troubled trash-collection giant, John Drury suffered a seizure at his lake house in Austin, Texas. As top man at his own trash hauler in Houston, Drury had masterminded the stunning takeover of Waste, which had been crippled by management turmoil, earnings disappointments, and, earlier in the year, one of the great book-cooking scandals of the decade. Drury had walked away with a company three times the size of his own. He was widely seen to be its savior.

Three weeks after Drury's seizure, Waste Management issued a press release announcing that its CEO would undergo brain surgery to remove a "small, localized mass." The statement quoted Drury explaining that his condition was neither life threatening nor incapacitating and that he expected to be back at his desk "at full stride" within ten days.

In the eight months that followed--even as it became clear to everyone close to the company that Drury was in fact fighting for his life--the CEO's absence drew surprisingly little public attention. Waste's board, reconstituted after the merger to provide tougher oversight, made no move to bolster Drury's thin executive team, which was laboring to meet Waste's aggressive earnings forecasts and carry out the massive integration. And in their reports to investors, the dozen analysts who follow Waste never openly explored the impact of its CEO's illness and blithely maintained their "buy" ratings on the stock, which rose 20% to more than $53.

In early July the first in a new string of ugly announcements--involving, yes, management turmoil, earnings shortfalls, and questionable accounting--shattered all those "business as usual" illusions. Waste shares have since plummeted by more than half, wiping out nearly $20 billion in shareholder value; the SEC has launched an inquiry into the earnings disclosures and heavy insider trading that preceded them; and the company itself, having accepted Drury's resignation, is again hunting for a new CEO--its sixth in just three years.

Among investors the rage was understandable and focused on the obvious question: How could it possibly happen again? Pondered one Wall Street analyst: "Are these the Blair Witch assets of the solid-waste industry, doomed to haunt whoever dares seek to manage them?"

Inevitably, everything that has happened at Waste this summer has been viewed through the unflattering prism of the company's past. Presiding over a longtime acquisition machine that had begun to sputter, executives of the old Waste, it was later discovered, had turned to massive accounting manipulation in the mid-1990s in a desperate bid to boost earnings ("Garbage In, Garbage Out," May 25, 1998, is available in the fortune.com archive). The situation was so dismal that a newly recruited chairman and CEO brought aboard in mid-1997, just as the scope of the problem was starting to emerge, quit after four months. Waste eventually took a pretax charge of $3.5 billion and restated earnings back to 1992.

The industry giant's sale to John Drury's USA Waste--completed in July 1998 for $19 billion in USA stock--was supposed to end the turmoil. The son of a garbageman, the hard-charging Drury, now 55, had built his company into the industry's third largest through rapid acquisitions and lean, highly decentralized management. "It's a simple business," he liked to say. "We don't know that we're real good at a lot of things. But we're damn good at picking up garbage." The merged company, which took on the Waste Management name, would be huge--68,000 employees and 20% of the nation's business--but Drury and his No. 2, president and COO Rod Proto (who was fired last month), promised to keep it nimble. They pledged $800 million in first-year synergies from the deal, starting with the shutdown of Waste's bloated 1,400-employee headquarters (USA had a central staff of just 130). They even vowed to restore Waste's status as a growth company; 1999 earnings forecasts were about $3 a share--more than 50% better than the two companies' combined 1998 results.

But all those rosy predictions counted on one thing: leadership. Drury did indeed return to work, part-time, after his initial surgery for a brain tumor in November, which was officially pronounced a success. But even then, Proto tells FORTUNE, "he was only about 20%." And Drury's condition only got worse: First he required a course of radiation; in February, painful blood clots in his leg entailed more surgery. In March, signs that a piece of the tumor was still growing led to chemotherapy. In May, Drury spoke at the annual shareholders' meeting. He was weak and in a wheelchair. Still, the board proceeded with its longstanding plan to name him chairman. A few days later, in a quote buried in a company press release about a debt offering, Drury gently acknowledged what had been reality for six months--that he was finding it "difficult to maintain a normal work schedule." In June, Drury underwent more brain surgery to remove scar tissue that was causing excruciating headaches. More chemo followed. Throughout, says Proto, "the expectation was always that John was coming back. It was next week, next week, next week--and next week never came."

Waste director Ralph Whitworth, a money manager and shareholder activist who recently took over as company chairman, says the board monitored the situation closely from the start. Still, it took no action to remove Drury, place him on leave, or appoint an acting CEO. Whitworth points to two reasons for the board's inertia: First, the optimism of Drury's doctors, who described the tumor's growth rate as "moderate" and the CEO's condition as "highly treatable," led the board to expect that he would return to work full-time within weeks. Second, says Whitworth, "everybody was very comfortable with Rod Proto, not just to lead the company [temporarily] but as John's successor. He was widely revered as the best operator in the business."

A 20-year veteran of the trash business, Proto, 51, had always shared a heavy workload with Drury, even in normal times. Now he was holding down his own job and Drury's too, all while presiding over the post-merger integration. Still, Proto insisted he could handle it all--and the board took him at his word.

Looking back, directors say, accepting that assurance was a mistake. "We didn't realize the magnitude of the job the management team was dealing with, because it wouldn't be in their best interests to yell for help," says U.S. Filter CEO Richard Heckmann, who served on the Waste board until August. Proto acknowledges his own bravado: "I told them it was all okay."

But of course it wasn't. After the market closed on July 6, Waste Management served up bad news, badly explained: Because of a $250 million revenue shortfall in its North American trash business, second-quarter earnings expectations (previously 78 cents) were being cut to between 67 cents and 70 cents. Even worse, Waste expected the shortfall to "similarly impact future quarters"--and suggested it was clueless about what had gone wrong. A comment from Proto noted obliquely that understanding the shortfall's "root causes" would require "further analysis."

The next day Waste stock plunged by 37%, to about $34, on huge volume. Analysts, left to speculate about what was going on, pelted the company with downgrades. Then the word spread that 13 insiders had sold more than a million shares in May, at prices above $51; Proto alone had sold 300,000 shares, for about $16.5 million. The company explained that all the insider sales (which continued into early June, totaling more than $70 million) had taken place weeks before the revenue shortfall surfaced. But few observers were appeased. The SEC began an informal inquiry, Waste got hit with a flurry of shareholder lawsuits, and the board hired a law firm to conduct its own investigation.

The directors had also resolved to step in. The earnings bust had shocked them too; as recently as June 14, Proto had assured them that he expected Waste to make its numbers. And while the board knew the insider-trading window, after a series of mergers, was being opened--two directors had themselves sold small amounts of stock--the massive selling, so early into this merger, had infuriated several of its members. Says Whitworth: "It's bad judgment--on its face."

In Houston for a July 12 board meeting, Whitworth visited Drury and organized a conference call with his doctors. The medical team still insisted that Drury might be able to resume his duties, but the board secretly contacted Richard Ferry, head of the executive search firm Korn/Ferry International, and asked him to start looking quietly for a new CEO. Proto offered to step aside; the board decided instead to appoint a three-member executive committee headed by Whitworth, who was also named interim chairman.

Still, the bombs kept falling. In late July board members discovered accounting issues that, while involving just tens of millions, were all too reminiscent of the 1998 debacle. They included the inflation of the first quarter's earnings by undisclosed nonrecurring items. In early August the second-quarter earnings came in at 58 cents a share, 20 cents short of the original forecast. The stock sank below $25. By that point the board had already sacked the CFO and general counsel--and was preparing to fire Proto. Says Whitworth: "He lost his effectiveness because he lost credibility." Whitworth recruited Steve Miller, an outside director who had done an emergency stint as CEO of Waste Management before the merger, to jump in again.

The announcement came on Aug. 16. Proto was gone. Drury would keep a seat on the board but had resigned as CEO. Whitworth was named chairman, Miller interim CEO. And while Korn/Ferry officially launched its search for Drury's permanent replacement, the board announced plans to boost the stock by selling off noncore assets and up to 10% of its North American trash business. The company's acquisition program was essentially shelved. Waste Management's days as a growth company were over--again.

Given Waste's recent history, it would be easy to read too much into this latest chapter. Wall Street shouldn't lose sight of the fact that the merger was clearly a smart deal, one that has already produced enormous efficiencies and increased profits. Even analysts' revised 1999 earnings forecasts, for $2.23 a share, represent a big jump from the two companies' 1998 numbers.

Still, there's no getting around the fact that the deal's real potential has been derailed--temporarily, at least--by managerial miscues and defaults at a number of levels. Drury's team moved too aggressively in certain regions to raise prices, driving off customers. And it fumbled the conversion to a unified computer system, sending accounts receivable soaring, jamming the company's phone lines, and delaying timely financial reports.

But the biggest shock to Waste's stock, and to its public image, was bad forecasting--and even worse management of Wall Street. Waste projected its aggressive 1999 earnings targets from what now appear to be unusually high numbers for 1998. Good old Waste Management gimmickry may explain part of it: After the merger was announced in March 1998, managers at Waste were told their entire year's bonus would be based on earnings through the date of the deal's close--July 17. That would have provided incentives to shift work into the second quarter and defer expenses. Although the evidence remains anecdotal, says Whitworth, "it's logical to think that happened."

Proto concedes that trying to fill two jobs diverted his attention at the worst possible time. "I thought I understood what was going on in the company," he says. "If there wasn't so much going on, it wouldn't have been a problem.... I'm really sick about this," he adds. "It cost me a great job with a company I love."

Ultimately, Waste Management's biggest problem was its recurring one: Although some Waste directors believe the entire USA Waste team simply wasn't up to managing a $12 billion business ("These guys couldn't run the place," says one), others feel certain Drury's absence made all the difference. "There's an enormous intangible that you can never put your finger on--the fragility of a company without its strong leader," says Heckmann. "It wouldn't have happened if John were there. He wouldn't have let it happen."