Michel Desbiens is President & Chief Executive Officer of Donohue Inc. This column was excerpted from the keynote speech given at the Miller Freeman Inc. Publishing and Communications Papers Conference at the Marriott Château Champlain in Montreal, Quebec, Canada, Sept. 27, 1999

Consolidation to build cost-effective businesses

1. a new approach to doing business

2. a better quality of internal company communications, and

3. a clearly-defined corporate strategy.

Our industry is famous for constantly adding supply as if there were always a world shortage around the corner. From newsprint to coated free-sheet, there always seems to be a growing list of new projects to add capacity. Although, speaking for newsprint, we seem to be getting a little more disciplined in North America, capacity addition continues in Europe, and I would not be surprised to see a resurgence of projects in Asia as the economy improves. As the market becomes more and more global, there really is no place to hide. If a supplier believes that dumping a few tons in the short term is not going to affect anyone else, that it’s too far away to matter... he’s wrong. These days, the whole world is our back yard. A few thousand tons here, a few thousand more there... it adds up fast. And in the long term, we all pay the price.

That’s why I say we need a new approach. Each of us needs to exercise self-discipline when looking at potential new capacity. And each of us needs to make a better analysis of returns. Returns must be sufficient that we can afford to meet the increasing expectations of customers in terms of better quality, runnability, printability and must also be sufficient to fund the increases in operating and capital costs.Margins must be reasonable, because ultimately, to stay in business, each company must ensure a fair return for shareholders.

At the corporate level and the board level, that means adopting an operating discipline and a constant focus on profitability. I am fortunate to work at a company where the executive team and the board share this approach. That has certainly helped Donohue maintain a solid return for our shareholders.

The approach I’m advocating requires that all the organization structures reflect this focus on profitability. An economically viable business approach has to take into account everything from environmental standards and sustainable forest management to labor relations. How can we strive for a more responsive industry if we are constantly plagued by strikes? Labor relations must evolve in order to overcome these disruptions.

Consolidation offers companies the chance to retain the best elements as they combine operations to build cost-effective businesses. I am optimistic that the boards and management teams of these merged operations will bring a stronger commitment to self-discipline, particularly with regards to new capacity. That’s mainly because of shareholders. They have great expectations of these mergers and they will not wait indefinitely for reasonable returns.

The second key to success requires companies to move from the mentality of a papermaker to a more sophisticated business model. A lot of pulp and paper companies still work with a “silo mentality.” That must change, and, as mergers and acquisitions take place, we have the perfect opportunity to improve the internal communication and teamwork in our corporate organizations. We must each work as an integrated team which uses operating margins, return on equity and net contribution as benchmarks. This shift requires better and faster communication channels inside each company.

The third key to success is a clear corporate strategy. A clear, defined, strategy must come before the mergers and acquisitions, not the other way around. There is no advantage to huge consolidations without a plan for achieving synergies and cost-efficiencies and increasing shareholder value.

Cultures must be merged. Workforces must be rationalized. Product lines must be harmonized. I cannot emphasize enough that strategic planning is essential to making this happen successfully and profitably. Bigger is only better if there is discipline and a sound, long-term strategy behind it.

Now is the ideal time for the North American industry to undertake this challenge. All products are regaining strength. Prices for a majority of paper and packaging grades are rising. Pulp prices are rising. Sustained economic growth in the U.S. and strengthening economies in most European countries are boosting demand. In addition, consumption is starting to recover in Asia.

Now, more than ever, is the time to take the bull by the horns and ensure that the recovery is not derailed by short-sighted sales decisions and excess capacity. Discipline will be the most important factor in determining the success of our industry – long after the dust has settled on the mergers and acquisitions of 1999. Our ability to exercise self-discipline will determine the viability of existing operations and the profitability of restructured companies. When we prove that ability, then –and only then –will investors gain confidence in our sector as a source of adequate returns. *