The current wave of M&A activity continues to reshape the competitive landscape in the paper and packaging segment
May 2008
By Felicia Willis, Associate Editor
Mergers and acquisitions have always had their place in the forest products industry. Over the past several years, there has been a significant increase in M&A activity, with the sizes of the deals changing considerably.
Deal sizes in the early 2000s and prior were mostly large companies devouring smaller companies, compared with the past five years where the level of M&A activity, as measured by the number of transactions in the industry, has increased as major companies have acquired divested segments of larger players and smaller mills. Examples of this earlier trend include International Paper acquiring Champion International, Weyerhaeuser acquiring Willamette Industries, Georgia Pacific’s acquisition of Fort James and Westvaco and Mead merging.
Accenture, a global management consulting, technology services and outsourcing company, has conducted its own research, and coupled with its own experience from M&A the company was involved with in the industry, found that the reasons behind M&A activity vary, but deals generally stem from the essential belief that companies can create more value together than separately, which in business, is usually the main goal – to create more value.
What works, and what doesn’t
The successful mergers and acquisition activities in the forest products industry have had a number of distinguishing features including a clear vision of M&A goals, an established M&A function for finding and selecting targets, and recognizing value based on the implementation of a company’s best practices, processes and systems. Additionally, the many mergers that fail to deliver expected results, according to Accenture’s research and experience, are mainly due to two fundamental issues: insufficient integration planning and failure to address people and process issues in the supply chain.
Ravi Chanmugam, who leads the North America corporate strategy and M&A practice at Accenture shares that a well thought out strategy and detailed planning going in to M&A, that includes all the people that will be involved in the final product is a main component of a successful operation. “Companies must make sure that the team that is thinking about the acquisition and doing the due diligence also involve the operators that are expected to deliver the results.” The secret to success, according to Chanmugam is “to bring the key operators into the due diligence process early so they can get a better grasp of the synergies and the risks.”
The people who are going to be involved in the actual day-to-day activity, not just the planning stages of the M&A, but also the implementation of it, must be involved in the early stages, according to Chanmugam. “Over resource the integration planning with strong operators, especially in the early phases. A common mistake is when companies involve only financial people during due diligence. Once the deal is announced, they hand it over to the operators and expect them to ‘make it work’.”
“Oftentimes,” Chanmugam continues, “different cultures clash, and new leadership teams don’t agree or get along. That’s what tends to be the root causes of why the plans don’t come to fruition. Cultural matters and people issues are very important.”
Mergers & acquisitions often run into problems in the form of procurement and supply chain disruptions. Nearly half of the executives in the recent Accenture M&A survey cited issues such as increased product-launch disruptions, a loss of talent, diminished product or service quality, problems with order-fill rates, stock outs, inventory buildups and increased supply disruptions.
In addition, forest products companies cited poor results from slow integration (plant shutdowns, staff reductions, organizational changes, etc.) and the lack of implementation of common platforms. Examples of M&A issues that have occurred in the forest products industry include:
- Procurement, supply chain and product-launch disruptions
- Problems with product or service quality, order-fill rates, stock outs and inventory build-ups
- Management team selection and retention
- Delayed staff cuts due to a unionized workforce
- Poor cost/price analysis on grade and capacity rationalization due to requalifying of product and other difficulties in moving product to a new mill (in order to achieve the optional capacity allocation)
- Institution of burdensome reporting and decision-making systems
- Unrealistic forecasting of anti-trust rulings in preclose periods, incurring high costs
- High IT infrastructure costs due to lack of common platform and processes
Case study
A US based mid-sized paper company (company A) acquired certain assets from another smaller company (company B). Company A acquired these assets in a strategic way. They were involved in intense planning sessions prior to any moves being made, and knew exactly how and why they would reconfigure their current mills around the newly acquired mills.
Company A had a strong, well thought out strategy. There was a great deal of due diligence around what synergies they could create by acquiring these certain assets. They knew from the start that this move wasn’t to make a bigger company, but to make a better company, and in the end, a better product.
Company A very thoughtfully and carefully planned the integration, paying attention to what they knew would be the trickiest areas such as moving product that was made at one mill, to be made at one of the acquired mills from company B.
The individuals involved in the planning recognized early on the people issues were the biggest risk. It is always a major move to shut down one mill and move all the products made there to the newly acquired mill. Company A exhibited a significant amount of appreciation for the people issues in both mills. There was a magnitude of sensitivity for the people and cultural issues that enabled them to get through the difficult issues more quickly.
These things, integration planning, strategy, due diligence and sensitivity to the people employed by both companies A and B, made that particular acquisition successful and eventually doubled the size of company A.
Future trends in M&A
David Rossi, managing director for Accenture’s forest products practice, shares that over the past several years, the trend in M&A has been more focused on acquisition rather than mergers, with the exception of newsprint. Forest product companies have become more focused on segment strategies, leading to a series of non-core divestitures and acquisition of strategic assets. In our industry, we have seen that rather than merging or acquiring full companies, the trend is to focus on pieces that fit into a well-defined business strategy. “As examples, we have worked with our clients to identify strategic assets for acquisition, based on fit with product portfolios, supply chain strategy and geographic footprint. Once the targeted assets are identified, we often continue working with the acquiring company as they define the operating model for the new business and capture the synergies and revenue growth targets that spurred the acquisition, says Rossi
According to the research and trend studying by Accenture, the future will be defined by factors such as growth rates in the emerging markets, commodity prices, market reation to the recent restructuring efforts and strength of the dollar. Based on the signals in today’s market, the next several years should see continued consolidation in local geographies as players strengthen their position in strategic segments such as containerboard and packaging. On an international basis, we can expect more alliance and joint venture activities as global players work closely with partners that can provide local markets expertise to the ventures, especially in the emerging geographies.
Beyond M&A there are many challenges the industry is facing which include talent shortages through the aging workforce and the shrinking of the candidate pool entering the industry, alternative use of forest resources, regulatory pressure and seeking growth to increase performance, to name a few.
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