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Quad/Graphics : An Affair to Remember

May 2011 By Erik Cagle
Senior Editor
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It started out as a friendly, innocent lunch, which is usually how it happens. What it evolved into was the largest, most transformational acquisition in the history of the U.S. printing industry.

Somewhere between Joel Quadracci's Cobb salad and the halibut enjoyed by Mark Angelson was the groundwork of something huge and revolutionary, the genesis of an event requiring not only intestinal fortitude, but the financial wherewithal to pull off—coming on the heels of the most crippling U.S. fiscal crisis since the Great Depression, no less. Angelson, the executive nursing a once-proud printing behemoth out of bankruptcy, wasn't just hoping that Quadracci would pick up the check. Angelson wanted him to offer hope for Worldcolor's future.

Yes, as affairs go, one would be hard-pressed to top the $1 billion cash and stock deal in 2010 that enabled Sussex, WI-based Quad/Graphics to acquire Worldcolor of Montreal. That fateful lunch took place in August of 2009, and the following January both organizations shocked the printing world with their announcement. That Quad was able to perform its due diligence without word spreading like wildfire is a minor miracle in itself.

At face value, the transaction takes on the appearance of a snake swallowing a much bigger prey (Worldcolor reported revenues of $3.1 billion for 2009, with Quad at $1.8 billion). Though there was motive and opportunity involved, this is hardly a cut-throat tale. In a sense, Quadracci—chairman, president and CEO of Quad/Graphics—rescued the former Quebecor Printing, World Color Press, Quebecor World, Chapter 11 rehabber and RR Donnelley hostile takeover target.

Viewed up close, the savior spin may be difficult for some to swallow. After all, no sooner had the July 1, 2010, completion of the mega-deal became official then the wheels were set in motion to begin the integration process. In the 10 months since closing, 4.3 million square feet of manufacturing space has been eliminated. Nine plants have been shuttered. A net total of roughly 3,000 positions have been eliminated. Only 10 other printers on the PI 400 industry ranking have as many as 3,000 employees. The entire integration process is expected to take 24 months.

For Joel Quadracci, executive heir to the kingdom assembled by his father, the late Harry V. "Larry" Quadracci, this deal was a challenge unlike anything the company had ever done. After all, Quad/Graphics was a private firm that didn't make a lot of attention-grabbing moves. Sure, the elder Quadracci used to throw some extravagant bashes—remember the story of his grand entrance riding an elephant? But, to the outside world, it was a company known for technology innovation and a well-defined corporate culture; where management and rank-and-file workers alike proudly donned their blue uniforms.

It was an employee-centric paradise known for its in-house child daycare programs and progressive on-site health care facilities. The workers showed their appreciation by making Quad/Graphics arguably the most well-rounded and successful printer in the game.

But M&A plays? That's Joe Davis or Bob Burton territory.

"On day one, we had a company-wide town hall meeting," relates Quadracci. "We installed flat-panel screens at all of the Worldcolor plants. I wanted everyone to be able to see and hear me. The people at Quad are used to that, but not at Worldcolor. I told them we had tough decisions to make, and that we were trying to allow as much time as possible for people to plan their lives. You have to make (tough) decisions with your head, but implement them with your heart.

"Quad has a history of making bold and aggressive moves during downturns. However, with bold moves come uncomfortable circumstances that force you to make difficult decisions."

Following the acquisition, plant closures and head count reductions were expected. There was tremendous redundancy between the companies' respective magazine and catalog platforms, which happened to be the most challenged of the Worldcolor divisions, according to Quadracci. But, what a bounty Quad/Graphics has reaped: books, directories, retail inserts, direct mail, commercial and specialty printing (not to mention a presence in Canada and significantly expanded holdings in Latin America)—all of them new offerings or significant augmentations to what had been modest Quad holdings.

Quad went from 28 facilities, including a number of its famous mega-plants, to nearly 80. The employee base billowed from 11,000 to about 28,000 (now roughly 25,000).

The excitement is palpable. The former Worldcolor employees are being introduced to Quad's matrix management system. One of the biggest early challenges was getting enough of the trademark blue uniforms, which everyone immediately sought, wanting to be a part of something special. Plans are under way to make their facilities more efficient. Preventive maintenance is being stressed, a commitment Quadracci is backing up by targeting nearly half of the firm's 2011 budgeted capex—some $170 to $200 million—for improvements to address equipment maintenance.

The Quad company culture is slowly taking hold; Worldcolor émigrés are learning there are other ways to accomplish the same ends. It is OK for them to seek help, for the "every facility for itself" mentality doesn't exist at Quad. Quadracci is blown away by the talent level of the Worldcolor folks, but not surprised. For too long a time, workers at Quad's one-time rival were forced to fulfill customer expectations without state-of-the-art equipment.

"One thing that helped make the decision for us (to acquire Worldcolor) was knowing there were a lot of longtime printers who had been producing some real quality work without being given the proper tools," Quadracci remarks. "We used to refer to the Worldcolor folks as the Russian Air Force. We knew that they weren't investing in the platform properly, and that they were expected to do a lot with a little. That's what happened in the latter days of the Soviet Union...somehow, the pilots still made the planes fly.

"Before and during Worldcolor's bankruptcy process, we didn't hear of any complaints from customers about employees dropping the ball on their work. They actually held up quite well. They have a lot of experienced printers, some of whom even knew my father and my grandfather when they were at (the former) W.A. Krueger Co."

As if taking on a company much bigger than itself wasn't enough of a challenge, Quad/Graphics also decided to go public in order to facilitate the transaction. Quadracci didn't want to "lever up the balance sheet" and take on too much debt to acquire Worldcolor.

Similarly, the Quadracci family didn't want to bring aboard a private equity partner that would have short-term expectations. Rather than use a traditional Initial Public Offering (IPO) to raise money for the deal, Quad issued shares to the existing Worldcolor shareholders to complete the transaction.

The Quadracci family is ensured of generational leadership, as it holds high vote shares that allow it to control 80 percent of the vote even though it maintains just 33 percent equity ownership in the combined company.

Completely dwarfed by the Deal of the Century was Quad's acquisition of Burlington, WI-based HGI Co., a $45 million commercial, catalog, book and publication printer headed by Craig Faust, one of the industry's unheralded young superstars. The union began as an investment in HGI by Quad, with an eye toward a potential future merging. But the parties soon decided there would be more advantages in HGI joining the Quad fold. Faust now heads Quad's commercial and specialty division.

Quadracci is bullish on commercial printing opportunities. He'd gotten sufficient feedback indicating demand among customers; in-store signage has surged in popularity. He saw opportunities being created by digital technologies.

As for the potential of more deals down the road, while Quad/Graphics may never make another acquisition as large as Worldcolor, other opportunities loom. "This is a business with strong cash flow and a good balance sheet," says its CEO. "We've paid down debt more aggressively than expected, so we have a lot of tools to play with and we look at the world as a place to play, not just North America.

"Acquisitions are just one tool in the toolbox of how to grow a company," he continues. "In a major way, Quad has created a new muscle, and that's the ability to do a significant acquisition and do it well. It's about profitable growth, not about growth for growth's sake."

If that is Joel Quadracci's legacy, he is well on his way to filling the big shoes of his father. Larry Quadracci, as he was known to his employees, was a showman of the first degree. Typically resplendent in a bow tie, he was an everyman printer who did not segregate himself to the corner office.

His drowning death in July of 2002 marked the depths of a dark period in the firm's history. Only weeks before, the collapse of a 10-story automated storage and retrieval system triggered a fire at the Lomira, WI, plant, killing a contract worker.

The elder Quadracci was a man with great foresight, who saw the importance of growth in the 1980s and the need for Quad/Graphics to "get big, fast!" in order to have the means to keep up with technology. Prior to Larry Quadracci's passing, many familiar company names had disappeared from the printing landscape, having been consolidated or—unable to make the necessary changes—closed their doors. The big players, including Quad/Graphics, got bigger.

"My father knew that you had to run a company for the day," Quad–racci says. "He wanted the core of the culture to be strong, enabling him to zig and zag as the circumstances around the business changed. My father's ability to recognize opportunity was also one of the keys to Quad's success. He had a history of looking at an economic downturn as an opportunity, because it's important not to get stagnant and scared to run the business."

Much of the firm's attention in 2011 will be centered on continuing the integration process, but Quad/Graphics will also continue to focus on paying down debt. Quadracci says opportunities lie in growing both logistics and the digital platform, and there are more efficiencies to be gained from the matrix management system.

"I like to say there is no finish line in business. The finish line is when you go out of business," he adds.

"A good company is able to make the right decision for the times. (My father's) heart would've skipped a beat at the thought of us going public and acquiring someone bigger than us. On the other hand, he would've looked around at the circumstances and said it was exactly the right thing to do." PI


 

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