A Frankenstein of a Merger

Dyer's Ally Versus Acquire Analysis

A recent blog post in Dead Tree Edition teased at the prospect of a possible Quad/NewPage merger. It’s fascinating to consider…and my thoughts on the topic will hopefully become clear as you read this post. First, however, let’s establish one fact—mergers don’t really exist. There’s the acquirer and then there’s the acquired. Feel free to verify that with the people from World Color, Stora Enso, and currently, the company formerly known as Vertis.

Any ideas of who the acquirer might be on this potential Frankenstein?

NewPage doesn’t release annual reports, but as a public company, Quad does. Its most recent 10K filing is almost a year old, but I took a look anyway to discover insights into its business strategy and search for hints of a possible deal with a paper mill.

Quad’s services fall into three buckets: printing, media solutions, and logistics. These services deliver value to their customers by:

  1. Helping customers maximize their print ROI.
  2. Providing these services at the lowest cost in the industry

Initially, I imagined that Quad’s strategy is to hope that print successfully integrates with other media to remain a viable marketing channel while they hold out as the low cost provider to build market share. Hope may be a political campaign slogan, but it’s no substitute for strategy.

Upon further review, I concluded that Quad’s strategy is to protect its core. Thus, its focus is on print, media solutions, and logistics. Nowhere in their filing, however, do I see hints of “purchasing the largest manufacturer of coated paper in North America,” but I keep a travel bag in my trunk and I’m always ready for the unexpected adventure.

If Quad were to go after NewPage, the investment thesis would primarily involve scope. Why would a company focused on the scale of its current business (to be a low cost provider) engage in a “bet the company” deal based upon scope? To examine the merits of a prospective Quad backwards integration, a look at Jeffrey Dyer’s When to Ally and When to Acquire provides a framework for analysis.

First, we examine the nature of the synergies of a proposed merged entity. I would classify them as modular and liken them to airlines and hotels. Those who fly airplanes probably buy hotel rooms and vice versa, but when they’re bundled together, consumers normally don’t see tangible benefits. And the companies soon realize that their supposed synergies don’t create any value. Hotels have no use owning airlines, which is why you see business alliances as opposed to acquisitions.

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  • Paul Gardner

    Thanks for the perspective Dustin!

    But I’d take issue with you on two points:

    "Neither… has strategies that complement the other."
    Perhaps, but Sell More Paper and Sell More Print seem to me to be closely aligned, perhaps even complimentary.

    ‘No redundancy, no synergies, no savings, no benefits and in the end, no reason to acquire."
    You’ve focused exclusively on hard financial criteria, and missed the incredible Marketing play to be had here… "The world’s only fully integrated print communications company." "Direct from the Tree…"

    May not make sense, but it sure would be fun to watch – and to learn from !

  • Seawardco

    Don’t be so quick to condemn this merger. Assuming Quad is the acquirer, I see the business relationship more like Delta buying that Philadelphia refinery. Quad is in the business of adding value to paper in its manufacturing operations. NewPage makes that paper. NewPage is a consumer of the clean waste paper created by Quad. The vertical integration is obvious. Quad’s Logistics is a natural fit to all the moving around of the paper & pulp NewPage makes and the pulp it buys. Quad could also benefit from the ‘new’ black liquor tax as well.

    In the market, Quad would have to convince its competitors to still buy NewPage paper, but as the paper industry shrinks, that might become less of a problem and more of an asset to assure paper availabilty to Quad when the dollar falls and imported paper may not be around to buffer the supply.

    Presumably, NewPage comes out of bankruptcy with a relatively clean balance sheet and, cash costing almost nothing, if the ROI calculations make sense, Quad could increase its financial footprint with this acquisition.