Stop the Re-Org Merry-go-round
Well, here we go again; another instance of a large company bankruptcy. The industry has seen a lot of reorganizations in the past decade, with Quad’s just-announced acquisition of Vertis’ assets a particularly pointed example.
Vertis filed Chapter 11 in July of 2008 while closing its merger with American Color Graphics. In November of 2010, Vertis showed up again in bankruptcy court in a voluntary, pre-packaged Chapter 11 filing that wiped away 60 precent of its debt. Then a month ago, Vertis was at it again.
Fortunately, the courts finally acted rationally, disallowing a third re-org in four years, and Vertis was forced into a pre-packaged deal. Quad was there to pick up the pieces.
Quad, which has already picked up the assets of Quebecor—which, in turn, had already done the re-org dance multiple times with World Color and a host of others—was right there, opportunistically, to pick up the hot-potato assets. Does anyone see a pattern?
What might be on the horizon for Quad, and what remains of the storied culture left behind by old Harry Quadracci? Is everyone still wearing the same jumpsuit and smiling for the camera?
What were some of these creditors thinking, and why would they possibly have believed the rosy turnaround plans put forth by the same management teams that sank these ships in the first place? To some extent, they deserve exactly what they’re getting right now—a long, slow burn. In this case and many others, they’re certainly testing the definition of insanity (repeating the same thing and hoping for a different outcome) and getting a positive diagnosis.
That said, I have to say that Joel Quadracci has, from my perspective, done an incredible job with his company. He has dramatically increased the size of the business while creating a liquid market for his family’s assets, and still maintained control of the board and day-to-day management. And I do think this is another great opportunity for the organization, but it comes with massive integration challenges.
Along with the creditors, the bankruptcy courts are also to blame for closing their eyes to the ineptitude of management teams and their fuzzy projections. Anyone can model spreadsheets to show sales and margin growth, but the hard work of due diligence must be done to avoid what has transpired in our industry. It’s embarrassing, it’s despicable, and it hurts the many small- and mid-sized businesses competing against these drunken monsters.
When your liabilities are cleaned from your balance sheet, it shouldn’t be difficult to avoid catastrophe for the next two years. Many would argue for a higher benchmark altogether. Some type of long-term sustainability seems reasonable.
Elizabeth Warren, former Harvard Law Professor, has long argued for tougher diligence on the bozos trying to keep their hands on the wheel once the accident has taken place. (Interestingly, studies have shown that those who have caused motor-vehicle accidents, even while quizzed in their hospital beds, believe their driving skills are superior to others). It’s called confirmation bias, and perhaps we need all need to be more meticulous in our own evaluations.
My brother has managed a printing account for half a dozen years, and one of the customer’s programs is for newspaper inserts. While it’s not the core of our business, we’ve always valued the program’s continuity.
When we first bid on the project, we were 30 percent high compared to Quebecor. We advised the client that Quebecor’s price would prove to be unsustainable, but we understood the decision to go in that direction.
When Quebecor went bankrupt, the client re-bid the work. That time, Vertis won with a price 30 percent below ours. And now that Vertis has imploded, we’ve inquired about the company’s plans for the program, while wondering if yet another competitor will continue this ill-advised pattern of unsustainable under-pricing.
The customer isn’t worried—Quad’s price was right next to the one Vertis gave it. The company is convinced that this is the market value for this kind of program, notwithstanding the ill fortune that beset the past two contract winners.
I think this story exemplifies some of the frustrations and inequities felt by the smaller, privately held companies in our industry—ones where the managers ARE the shareholders. We don’t receive any golden parachutes when we blow up our businesses. And as for customers, they really haven’t encountered much risk dealing with unsustainable entities. And that’s flat out wrong!
When I was much younger, I ran into a McKinsey consultant on an airplane and we struck up a conversation. He had done some work in our industry and I asked him to explain how Quad was so successful and Quebecor wasn’t. He could have listed a hundred points, but instead he gave me just one: Quad sells the same products for more money. Boy, how times change...
It’s time for the disruption that’s happening across our industry to turn into the more productive kind of creative disruption that we’ve seen transform other industries. This deal reeks of “Too big to fail.” Perhaps it’s the small- and mid-sized businesses, those of us whose shareholders and managers are one and the same, who will lead the way.