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Mack Attack! Cadmus, the Conqueror

May 1999
With its recent acquisition of the Mack Printing Group tucked away, Cadmus looks to conquer greater territories in select, niche markets—with an eye on journals, magazines, periodicals and packaging. What is the vision behind Cadmus' strategic plan? C. Stephenson Gillispie Jr. offers a few clues.


THE START of Spring marked the start of what may be the most lucrative of years for Cadmus Communications, which, on April 1st, announced it had acquired Mack Printing Group—a leading producer of journals, magazines and periodicals with annual revenues of approximately $165 million—for the purchase price of approximately $200 million, consisting of cash, seller-provided subordinated debt and Cadmus common stock.

There is no April fool here.

The acquisition of Mack Printing increases Cadmus' annual revenues by more than 40 percent and solidifies its position as a global producer of scientific, technical and medical journals.

While major, Mack has not been Cadmus' only big news of late—weeks earlier, Cadmus agreed to sell its Financial Printing and Custom Publishing divisions to R.R. Donnelley & Sons.

Just weeks before the Mack move, Cadmus officials reached an agreement to sell the two divisions, claiming these divestitures were part of an ongoing strategy to streamline the company's business units and focus its resources in select, niche markets. Immediately following the sale, Cadmus execs reported that the company was now poised for extreme growth for 1999 and well into 2000.

C. Stephenson Gillispie Jr., chairman, president and CEO of Cadmus Communications, is the man behind the moves.

Recently, Printing Impressions had the good fortune of catching up with Gillispie. In the final days of the Mack acquisition, Gillispie was good enough to answer a series of questions regarding the Mack move; the role Cadmus is pushing to play in the periodicals segment; his thoughts on the financial market; the hype surrounding all the consolidation making waves in the industry today; the looming threat of e-commerce; and the strategic significance of digital prepress and more.

PI: Cadmus recently engaged in transactions that mark a new milestone in the company's strategy to create leading businesses in select, niche markets. Your company sold its financial and custom publishing divisions and purchased The Mack Printing Group. It seems as though Cadmus is narrowing its focus and concentrating on select, core markets. What's the game plan for Cadmus?

Gillispie: Cadmus is following a systematic process to develop leading positions in markets where we can expect profitable growth. We have developed very specific criteria about the nature of the markets that we think will offer the best and most profitable growth.

Foremost among these is the ability to possess a leading position. Other important criteria include markets that are showing real growth; markets where there is an absence of organized or intense competition; and, most important, markets where we think we can perform well and add value.

Currently, the journal market meets many of these criteria. We have a leading position, and the exploding growth of knowledge is producing modest, but very attractive, real growth in this sector. The Mack purchase not only solidifies our position as the world's largest producer of scientific, technical and medical journals, it also increases our revenues by 40 percent and strengthens Cadmus by adding a business with a solid track record of consistent growth, double-digit operating margins and strong cash flows.

Similarly in our marketing businesses, while the Internet will bring great changes in marketing, retailing and distribution, products are going to be packaged. So, our short-to-medium run packaging business should be well-placed to grow robustly. We also think marketers are going to gain an increasing appreciation for the power of point-of-sale marketing and advertising. As one of the larger providers in this market and possessing well over 15 years of experience in this area, our point-of-purchase business is well-placed to grow with this trend.

PI: What are your views on the financial printing market, and why the decision to leave that marketplace? Reportedly, Cadmus concluded that financial printing did not complement its core competencies. Can you elaborate?

Gillispie: From what we can see today, the financial printing market provides great opportunities for those who are positioned to address them. With a robust stock market, the regulatory and SEC-regulated services promise to remain firm, and the demands of the mutual fund sector should only grow.

In assessing our position, we had three considerations. The first was the needs of our customers—some of the most esteemed organizations in the United States. The second, the well being of our associates, and the third, the strength of our strategic position and our long-term prospects for adequate shareholder return.

Our financial group, we believe, had an unusually competent and competitive group of associates and, in fact, did complement much of the rest of Cadmus' strategy. However, we think that the critical success factors in these markets are shifting away from core printing and typesetting to relatively elegant, electronic information processing and distribution services on an international basis.

We are investing heavily to develop these kinds of capabilities in our journal, packaging and point-of-sale businesses where we have much stronger strategic positions. In our financial business, we felt there was too large a gap to close. In the end, we decided to sell the business to Donnelley, which offered a solution that we felt would provide our customers with unparalleled capabilities, would provide our associates with terrific opportunity and was responsible to our shareholders.

PI: Looking at the industry as a whole, what major movements have been most significant—or most discussed—at Cadmus? What role has industry-wide consolidation played in the printing industry to date, and will all of this consolidation continue?

Gillispie: We are tracking a number of phenomena that will have a major impact on our industry—foremost is the possibility of further deflationary pressures on the whole economy. We are interested in the unfolding changes in capacity, distribution and ownership in the paper industry. We are watching a possible reduction in catalog pages and possible changes in the role of the traditional newspaper with much decreased circulation and page counts. These kinds of shifts could throw a lot of capacity on the market. Finally, the maturation of all-digital and direct-to-plate production flows is restructuring how work is managed and produced in the plants.

In our view, consolidation is not new. The industry has been consolidating for at least 10 years. As to impact on the industry, this consolidation trend has put, and will continue to put, great pressure on the pricing structures of the smaller companies. It is a fact that the larger companies can procure their raw materials at substantially lower prices. And, large companies can theoretically operate with significantly lower SG&A, and better plant and equipment utilization.

So, consolidation will continue because it does offer better economics and better use of assets. And it does address the continuing problem of too much capacity and too many cylinders. But having said that, I think there is still an important place for smaller companies.

Smaller companies can be particularly attractive to those seeking a very specialized and personalized form of service. Smaller companies often can find economies that might be unavailable to the bigger players. If I were running a smaller company, I would not give up yet.

PI: What steps can Cadmus and other major commercial printing operations take to deliver maximum value when it comes to paper prices?

Gillispie: There is so little margin left in paper that, for better economics rather than price, we have to look for change in the entire value and distribution chain. In other words, we need to find ways to have less paper in the entire pipeline, less waste and shorter times between the mill and the printer or end user.

At Cadmus, we believe we do one of the best jobs in the industry of procuring, handling and managing paper to produce the lowest possible cost to our customers. We have an extremely close, almost inter-linking, relationship with xpedx, which has reduced working capital dramatically, increased paper turns dramatically and come as close to just-in-time paper management as we think anyone in the industry has been able to achieve. We think that is how you give maximum value to your customers.

PI: Let's discuss digital technologies. How has the move to computer-to-plate and all-digital workflows affected Cadmus—and its customers?

Gillispie: Cadmus began developing an all-digital CPT process as early as 1983, with the installation of the Xyvision typesetting system. Today, in our journal product line, more than 75 percent of the products follow an all-digital workflow to the plate.

In our other businesses, we now receive over 90 percent of the work that comes to Cadmus in digital form. This has brought tremendous benefits to our customers. It has brought speed and reduced the time from the concept to the plate. It has brought more convenience—for example, remote proofing and real-time color editing between remote locations. It has brought flexibility in terms of the many directions and purposes that digital materials can take, and it has taken cost out of the system.

Learning to work in an all-digital environment, however, has not been achieved without some real pain. Perhaps the greatest challenge has been the wide disparity in customers' understandings of how best to prepare material for digital flows. This has required that we institute completely different approaches to handle customer service and job entry. Today's customer service representatives must be preflight experts and are assuming duties that were, just a short while ago, the providence of litho prep specialists.

PI: What's ahead in the digital preprinting and digital printing movements? How can Cadmus and other commercial printing facilities benefit from the digital revolution?

Gillispie: More of the same, at an accelerated pace. It seems reasonable to assume that we have barely begun to see the impact of the digital revolution. The major printers have only recently hooked into the Internet with wide bandwidth and high-speed access. The smaller companies are just now coming on-line.

The vendors of printing equipment, software and raw materials are just starting to introduce product and capability designed around the Internet. Y2K remediation has drawn a lot of resources; and many vendors were just adapting to the GUI interface when they found they had to have a browser interface.

So, it seems safe to say that we have not seen anything yet. What we will probably see next will be the equivalent of SWOP standards for electronic art and ads; job entry from the customer's office; real-time, dynamic price modeling; enhanced EDI; and similar electronic friendliness added to the most time- and cost-consuming printing functions.

PI: What effect will electronic media have on the printing industry over the next few years? Does Cadmus forecast that e-commerce may, eventually, take a bite out of commercial printing to any significant lengths?

Gillispie: As customers become more familiar with e-commerce, they will want the same convenience of ordering, modeling, status checking and communications with their printer that they will be getting from other vendors in other markets. So, we all need to make dramatic changes in our IT products and services.

We do not think e-commerce by itself is a threat to commercial printers. For example, whether people buy the product in the store or on the Internet, it still needs to go in a box and probably requires some written instructions or regulatory-mandated material. While people may—and we think will—buy increasing quantities through the Internet, they are not going to stop using convenience stores and quick service restaurants—two of the heaviest users of point-of-sale material.

The Internet is certainly changing the way people market, but rather than less print, these new patterns may increase print. For example, we think we could continue to see increases in the nature and type of direct mail as potential sellers clamor for visitors to their electronic address in the same way they have fought for visitors to their physical addresses.

What is the Cadmus future? To be certain, Cadmus will continue to strategize, develop niche markets and grow accordingly as this century closes. As for Gillispie, rest assured, his steady guidance and industry knowledge will likely benefit the Cadmus cause for quite some time to come . . . and then some.


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