Mega Merchant Merger

This week International Paper announced that it is in talks with Unisource regarding a proposed merger of xpedx, International Paper's distribution business, and Unisource. The proposed new company would be an independent, publicly traded corporation. Unisource and xpedx are the two largest paper merchants in North America.

So what will this mean?

Understandably, xpedx and Unisource did not respond to my requests for interviews. So, here is my view.

According to one estimate, the two merchants account for about $10 billion in combined revenue. Market-Intell estimates that of this, about $7 billion is paper, with the balance being graphic arts supplies, packaging and facility supplies. This gives the two companies a combined share of about 30 percent of the U.S. paper merchant business.

Certainly, a merger like this would create efficiencies in logistics and service, and allow cost reduction and synergies. This will give the new company the capability to provide better service, reduce prices, or increase profit margins. Given that profit margins are thin—xpedx profits in 2012 were only 1.1 percent of sales—it is reasonable to expect that the new company will focus on improving margins.

There is also the question of whether this consolidation will lead to less competition and higher prices. However, the experience on the mill side suggests that this is not enough concentration to affect prices and prices will remain competitive.

What is likely is that there would be some realignment of supply arrangements, driven both by printers and by the new company. Some printers concentrate their business with a small number of merchants, and if they have a high concentration with Unisource and xpedx, they may want to switch some of their business to another merchant. Similarly, the new merchant company may not want too much exposure with any one printer, and may realign its customer mix. At the same time, commission-based merchant sales reps have significant influence over some pieces of business, and if there is sales force duplication, some reps may move on and take business with them.