Special Report: What Does Quad's Worldcolor Acquisition Mean to the Marketplace?
There's been no shortage of news about Quad Graphics' pending purchase of Worldcolor. But now that the dust has begun to settle, what does it mean to the printers' customers? And what will it mean to the rest of the marketplace? Publishing Executive Inbox consulted a trio of experts for their insights and analysis on this monumental merger. D. Eadward Tree is the anonymous blogger behind Dead Tree Edition, a blog covering the production and distribution of publications. Alex Brown is president of Printmark, a consultancy specializing in manufacturing and magazine management. And a senior consumer magazine publishing executive—who agreed to participate on the condition of anonymity—weighed in as well.
INBOX: In all honesty, did you see this coming? Were there other acquisition scenarios that looked more likely, and if so, are any of those affected by this deal?
MAG EXEC: No way did I see this coming. I'm not sure which is more surprising—Quad going public or Quad buying a competitor that is actually bigger than itself.
D. EADWARD TREE: I have acknowledged in my blog that I had to "pick my teeth up off the floor," so obviously I was surprised. I thought Worldcolor would go it alone or that perhaps some kind of deal would be done with Donnelley.
ALEX BROWN: No, I didn't have the foresight to imagine a merger between two such vastly different cultures. It's easy now to realize that any consolidation seems to promise an increase in profitability, and printers will look to any quarter for rescue. But these two companies look so little like allies that you realize the building must really be on fire if they're going to be driven together.
It also came as a surprise because Donnelley's overtures, at what I believe to be a similar acquisition price, were rebuffed by Worldcolor last summer. Apparently, the Quad deal solved problems other than valuation, presumably including the structure of the new organization and the roles for key Worldcolor people in it.
Because there were already so few printers, the remaining acquisition possibilities fit on a pretty small corner of the chessboard. The smaller printers remaining all have a fairly large degree of free will, either because they are privately owned without immediate pressure to sell, or because they have sufficient financial backing. But as this merger demonstrates, printers may merge not because of shareholder pressure but because consolidation appears the only remedy for falling prices. I'm not so sure eliminating competitors can make up for the excess press and bind capacity out there, but that's the strategy behind this merger.
INBOX: How do you expect that its future as a public company and the scrutiny that comes along with Wall Street will affect Quad, and do you think publishers will notice a difference?
MAG EXEC: I think swallowing a larger, more diverse company will have more impact on Quad than its going public. In the short term at least, its need to shut plants and lay off employees will bring it far more scrutiny from the public, unions, governments, etc. than it is accustomed to.
D. EADWARD TREE: I don't think we really know what the "new Quad" will look like. Its usual approach is to achieve low costs by investing more in automation and new technology than the competition does, rather than by wringing the last penny out of old iron. I don't know if Wall Street will have the patience for that kind of long-term thinking.
BROWN: I'd be concerned. Not only will there be the classic short-term pressure to project frothy earnings, the printing industry is rather precisely the opposite of what Wall Street finds an appealing place to invest. Printing is mature, with bleak growth prospects. It involves labor, materials purchased from third parties, and large physical plants. Wall Street generally looks at such enterprises and asks, "What's that bad smell?" So the new entity will be offered no slack. It remains to be seen what kind of case the public company can make for itself. It could be a stable, well-capitalized business that captures a beefy chunk of U.S. printing revenues. But it can't make an exciting growth case. We'll have to see what the debt situation becomes. Worldcolor got a new lease on life (and a lot of debtors got pennies on the dollar) and now sports a pretty sparkly balance sheet. Quad's balance sheet is an unknown. And of course the initial public offering (IPO) itself hasn't played out, but it will add debt.
For publishers, the greatest worry isn't precisely Wall Street pressure but profitability pressure from any quarter. For decades, printers invested in new technology that just happened to help both printer and publisher. Yields were improved while quality and consistency were enhanced. Today, printers don't have to invest in new technology to compete on quality or features, not least because the equipment suppliers themselves face a dwindling market and have less motivation to innovate. Capital spending at any printer today is under pressure to deliver quick, substantial savings in manufacturing costs. No one looks at it from the customer's point of view. The danger for print buyers is that the price world we wanted is based on commodity buying, and now we've gotten just what we asked for. But buying a commodity doesn't include improving anything about that commodity except the seller's cost to make it.
INBOX: Are there some advantages to combining the Worldcolor and Quad cultures, or are these two companies so starkly different in their approach to sales, customer service, growth strategies, and the application and acquisition of technology that they can never fuse harmoniously?
MAG EXEC: I wonder if Quad is biting off more than it can chew. Worldcolor is a bigger company, with more plants and more business segments. Quad could learn a lot from Worldcolor about things like managing through adversity, consolidating plants, and some administrative areas where Quad is weak such as estimating and invoicing. But whether it will is another question.
D. EADWARD TREE: You can't change unless you recognize that you need to change. That's why I think the Worldcolor people are more adaptable than the Quad folks; the company has changed rapidly, and the Worldcolor folks realize that more changes are coming. Quad sometimes suffers from "Not Invented Here" Syndrome, which causes it to develop great innovations but also to be a bit arrogant and not learn from competitors. If the Quad folks think they can just swallow Worldcolor without rethinking how they run the business, they are in for a rude awakening.
BROWN: It will be fun to revisit this question in five years. Right now, it looks like a massive diversity exercise, which could, of course, be positively wonderful. But let's consider the ingredients of the stew.
Quad's approach to press and bindery equipment is to buy new, upgrade often, and tweak everything to a fare-thee-well so that their production processes are unique. QuadTech is not simply an ancillary business but a clarion call in the plant—we can invent a better way. The original Worldcolor made it a virtue to keep on repairing those Harris M1000As until every dime was sucked out of them; it was financial management without a nod to the pressroom floor. Quebecor tended to spend more lavishly, but it sought standard, repeatable processes and let equipment manufacturers define problems and solutions. Quad's culture is flat-out exhilarating from a tech standpoint, and there's a bit of QuadTech hardware in some of today's Worldcolor plants. Perhaps the operational merger will result in an elevation of everyone's attention to process refinement, with an emphasis on in-house tech skills. But Worldcolor doesn't even train its crews to think like Quad does. How would you like to do your job to your company's complete satisfaction for many years and then have a guy in a Quad flight-suit start telling you that you've got it all wrong? It will either be ugly or invigorating. And, remember, it will be nearly impossible for Quad to believe that there's a single good idea in any Worldcolor plant, so the dialog will go only one way, and that will be a mistake that shortchanges the best people at Worldcolor.
Quad and Worldcolor have distinctly different sales approaches. Of course, this merger is all about allowing Worldcolor to be able to sell on something other than cutthroat pricing. It may or may not have that effect, but surely the idea is to allow the sales message to lean toward Quad's "print with us and pay a premium because we're the best." The tricky part is that Quad's premium rested in part on a culture that customers could perceive as different. When you tour a Quad plant, you may want to apply for a job as much as you want to send your printing there. Will Quad's mystique survive the merger? Will it percolate to Dyersburg and St. Cloud? If the merger is to succeed, the net market price would rise, but not, most probably, to the lofty peaks Quad used to charge. I wouldn't expect Worldcolor's sales techniques to entirely blot out Quad's, but I imagine that sales will be more closely listened to when a deal is brought in for management's blessing. Worldcolor does know the market, and the prices they've accepted have become prevailing trends that Quad must accept. Aside from price itself as a sales tool, the combined company will be fusing sales forces that differ in temperament, training, company prestige and compensation. I'd expect the Worldcolor way to beat out the Quad style if only because the Worldcolor sales personnel are politically more savvy.
Quebecor/Worldcolor has grown by acquisition. You can even say they're good at it, though it took a lot of different management teams to consume everything from Ringier to Foote & Davies, American Signature to Worldcolor—not to mention all those smaller commercial operations. Quad spent a full decade muttering "never again" after acquiring the WR Bean plant in the early 90s. They're much better suited to green field startups, and have done well starting and expanding the plants in Wisconsin and upstate New York. These days, there's nearly nothing left to acquire, so Mark Angleson theoretically will end up with a lot of free time. Instead, the new company needs to master plant consolidation, a knotty little problem that stumped Quebecor after the Quebecor-World merger. Nevertheless, here's one more example of how different the two merging companies are—one grows by a relentless elimination of competitors through acquisition, the other starts new plants and steadily enlarges operations in a central location.
I could give more examples of the differences, but the key point is that in many cases the differences will tend to spawn winners or losers. There aren't a lot of compromises between some of these poles, but for the merger to succeed culturally the people affected will have to find them. If not, they'll be living through a particularly nasty round of corporate politics.
INBOX: Will Worldcolor customers have the ability to exit their contracts given the change of ownership? And will Quad customers be able to do the same given that the company will be going public?
BROWN: This depends on the contract. I include change of control provisions in contracts I help negotiate, but no printer's boilerplate treats the subject. Some publishers will have added a termination option for an event like this, but even those that do may be wondering exactly how to use it. It's not easy to be sure you want to exercise a right to terminate until the consequences of a merger have had time to play out. If you're inclined to terminate over price, you have to have some concerns that the merger hopes to stop price erosion and allow for increases. If you're terminating over cultural issues, you haven't yet much to go on. The company could be a stunning improvement, or you might be hearing grinding noises for years to come. Though the results of the merger are unknown, if I were a publisher happy with my current plant I wouldn't be especially quick to look for an exit. I'd rather watch things unfold from a good seat. What I might try is to negotiate a bridging contract extension. I'd exercise my right to terminate by amending my contract to allow termination in the future with, say, six months notice.
INBOX: The merger should eventually result in fewer presses, no? So should publishers expect capacity to tighten and prices to rise?
MAG EXEC: Yes, there will be fewer presses, though Quad and the other big printers will still have to invest in new presses to remain competitive. Print prices might stabilize, but I doubt they will rise, except perhaps during the peak catalog season in the fall. If the printers follow the example of the paper companies, they will tend to respond to overcapacity by hoping the competition shuts down more presses rather than by shutting their own presses.
BROWN: Yes, though consolidating plants is a harder exercise than it looks. The excess capacity that printers bemoan lies more in the schedule than the iron. The newsstand cycle makes peaks and troughs within the month, and Christmas and other seasonal forces do the same thing for the calendar year. The capacity solution isn't just closing plants but distributing work in each plant that draws on the full range of equipment all through the week, the month and the year. The decision to close plants may be getting easier, however, as printers realize that much of the volume lost during the recession simply isn't coming back. If the merger works for Quad, it has to lead to plant closures. One politically adept move might be for Quad to shut or shrink one of its own facilities while also closing down several Worldcolor plants.
The impact on prices, however, is more complex. I am not sure that shrinking the competitive landscape to two mega-printers, plus a number of smaller vendors that happen to have individual plants rivaling the size and capabilities of any one plant owned by the new behemoths, will actually solve the print industry's profitability problem. Print buyers are right to feel concerned that they've lost a reliable source of price cuts in Worldcolor. But as demand dwindles, the only growth lies in taking work away from someone else. Under those conditions, as long as you have at least two printers to call, prices will bend toward a seller's demands. They may no longer bend as far, but buyers will still have an edge. Quad has shown admirable backbone in trying to hold on to healthy margins, but if they're waiting for Donnelley to start agreeing with them, they're waiting in vain—RRD can seize the time the merger is settling in to make price overtures to any publisher worth courting.
The only way for printers to hold or increase price is to accept the possibility that volume will decline, and that pursuing growth has a very high cost in this mature industry. A plant that sheds a press and lets the new, lower plateau of demand take shape can be profitable if management has the courage to accept that we're in a new world with a diminished need for print.
INBOX: When will printer consolidation produce the typical economic result of price increases? Have we finally reached the tipping point to turn it into a seller's market?
MAG EXEC: We are a long way from a seller's market for printing.
BROWN: We've been in an oligopoly for quite some time. The Quebecor-Worldcolor merger looked like the last straw too, but prices have been continuously constrained. First it was the printer's hard-luck status as last in line behind the post office and the paper mills. Then it was the one-two punch of the burst tech bubble and 9/11. Now it's a recession wrapped around a society that is logically, inexorably, and happily evolving into consumers of digitally delivered news and entertainment. A seller's print market cannot emerge under those conditions, even for boutique print applications, because the residual capacity from print's heyday will always lag the drop in demand.
INBOX: What type of reaction do you think this news drew in Donnelley offices across the country?
BROWN: Donnelley should be happy, even if some folks spent a moment or two being miffed that they couldn't pull this off last summer. First, conditions would appear to allow prices to rise. (Again, I happen to believe it won't be so simple, but RRD still has to be pleased that the oligopoly has shrunk still further.) Second, Donnelley can spend the next year and half selling its known versus Quad's new unknown. And that includes making sales while Quad's attentions are understandably directed inward.