A Frankenstein of a Merger
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:
- Helping customers maximize their print ROI.
- 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.
Next, we look at the resources of each organization. By and large, their resources are hard ones—plants and equipment—as opposed to soft—people and ideas. However, because these resources perform different functions, there are few synergies of substance. Some might claim that sales synergies could be realized, but I’m not convinced that NewPage could sell to Quad more efficiently just because they’re owned by them. NewPage would still have to sell to other printers, and to do so, they would need to remain independent from Quad. In fact, IP and xpedx might serve as a good example because they’re not integrated, which kills SG+A synergies.
Next, we evaluate the redundancy of the firms’ resources. As vertically integrated companies, there is almost no redundancy. No redundancy, no synergies, no savings, no benefits and in the end, no reason to acquire.
When we look at the market factors for a deal, I would consider the degree of uncertainty to be relatively high based upon stock betas of Quad (1.36) and comps of NewPage, Domtar (1.75), SAPPI (1.29), and IP (1.54). High risk demands a big reward, and that doesn’t look possible with these two entities, each operating in mature markets.
So, does a NewPage acquisition help Quad maximize its customers’ print ROI? Does it help them lower their costs? From my vantage point, it does nothing on to help its customers, and I don’t see much effect on its costs either. We have two mature companies, neither of which has strategies that complement the other, and they’re both looking at a “bet the company” deal. It doesn’t make much sense to me.
So while I have affection for both companies at hand, any deal between them would certainly be a dog.
A third-generation printer, Dustin LeFebvre delivers his vision for Specialty Print Communications as EVP, Marketing through strategy, planning and new product development. With a rich background ranging from sales and marketing to operations, quality control and procurement, Dustin takes a wide-angle approach to SPC