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Expected Fallout From Quad, Worldcolor Deal —Michelson

March 2010

TALK ABOUT an expensive lunch. What began with Joel Quadracci and Mark Angelson sharing a meal last August to weigh the benefits of combining their respective organizations, has culminated in a deal valued at more than $1.3 billion. That's the price tag analysts have placed on the proposed acquisition of Worldcolor by Quad/Graphics, which is expected to close sometime this summer in tandem with the privately held Quad going public. Combined, the $5.1 billion behemoth will constitute nearly 30,000 employees and more than 60 production facilities in the United States, Canada, South America and Poland.

In announcing the deal, executives estimated that the combination will result in at least $225 million in annual savings within 24 months. The cost savings will be achieved through an integration process that entails plant closures and staff reductions, as well as by garnering greater volume discounts on consumable purchases like paper and ink.

The biggest driver of the merger, and impending plant shutdowns, is most likely the new company's desire to remove excess printing and binding capacity from the marketplace. Unfortunate for Worldcolor employees—even though its CEO is heading the integration and consolidation committee—is the reality that Worldcolor facilities seem most vulnerable for possible closure. Quad/Graphics plants, as a whole, are known for their industry-leading productivity rates and efficiencies, the result of Quad's dogged commitment to equipment automation and process control. Although Worldcolor has attempted in recent years to upgrade its web press technology platform, its plants far lag those of Quad/Graphics' in the implementation of "lights-out" automation, robotics and processes designed to reduce human touch points. Quad is revered for the technical innovations developed in-house by its QuadTech subsidiary, which has enabled the printer to maximize some equipment capabilities beyond manufacturers' rated speeds, manning requirements and typical web printing/finishing makeready waste percentages.

As the acquisition unfolds, the merger of what are two distinctly different corporate cultures will be most intriguing, and perhaps the most challenging. Whereas Quad has built a company organically with greenfield plant startups and by expanding some facilities into mega-plants, Worldcolor is an amalgamation of companies acquired by its forbearers World Color Press and Quebecor Printing. From a historical perspective, Quad has excelled at beating the competition by doing things better and more efficiently, whereas Worldcolor's heritage consists in large part by growth through acquisition.

The integration of Quad's and Worldcolor's sales forces will also prove compelling. In the publication and catalog markets—where the three industry titans of RR Donnelley, Worldcolor and Quad battle for market share—Worldcolor is known for its aggressive pricing. Will Quad (and Donnelley) now be able to maintain greater leverage with those buyers who can no longer parlay Worldcolor's low pricing to gain contract concessions? And, will the enlarged Quad/Graphics be able to convince Worldcolor's existing book and direct mail clientele that their "new and improved" print supplier is worth the added premium Quad seeks for being the industry leader? In good times, one might think so, but not so today with the shift to Web-based marketing and emergence of e-readers.


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