Tracking the World’s Largest Printing Company
In the interests of full disclosure, I do not own any shares in RR Donnelley and I have never met Mark Angelson. But if I had to name one of the sharpest business minds in the printing industry, Angelson would be near the top of my list. His rapid rise began attracting attention a little more than two years ago when he engineered the marriage between Wallace Computer Systems and Moore Corporation. This new company, Moore Wallace, was then merged with printing powerhouse RR Donnelley (RRD), in February 2004, to form the world’s largest commerical printing company, which Angelson now leads as chief executive officer.
Although the RRD/Moore Wallace transaction was classed as a merger, it is clearly the latter company’s management who lead the charge of this new firm. Angelson’s overnight transformation into one of the world’s most powerful figures in graphic communications is indisputable. Success, however, is not measured by size, and Angelson’s real accomplishment is evident by looking at the price of RRD’s stock since its rebirth. Steadily improving earnings were recently capped off by a positive top-line surprise in the third quarter of 2004 (revenues were up 2.9 per cent).
The investment community clearly likes what it sees. Even RRD management announced a massive repurchase of shares last month. Consolidation may certainly continue to feed this positive trend, but even joining Moore Wallace and RR Donnelley does not give Angelson the leverage to dictate price levels. He still faces many challenge and the real story at RRD continues to be the focus on cost cutting.
About 35 per cent of RRD’s sales come from magazines, catalogues and directories. Direct mail, books and financial print account for 40 per cent of revenue and the balance comes from its forms operations. Expect this makeup to change in the near future. When the Moore Wallace/RRD merger was first announced in November 2003, Angelson said it would enable the new company to generate annualized cost savings of at least US$100 million, maybe a little more, in the first 12 to 24 months. Of course, he also talked about the synergies of joining the two businesses. He said, “cross-selling is going to be a huge, huge part of this thing.” With all due respect, I beg to differ.
Angelson is smart enough to know that the biggest issue facing the industry is price pressure. The market remains too fragmented for any one company to set price levels and, if you cannot influence the price at which you sell your goods, the next best option is to control your costs. And there is a no more disciplined group of managers than those running Donnelley now.
During Angelson’s forever-industry-altering mergers, the most obvious cost savings came in areas where the two firms have duplication in services, but there were not that many between Moore Wallace and RRD. Both companies were involved in the direct-mail segment, and there has been some rationalization in there. Other than that, the two businesses were quite different. So the emphasis of cost savings was instead put on the sales of under-performing divisions. The packaged logistics business was jettisoned in the third quarter of last year. As of the third quarter, the company had trimmed 2,955 positions, leaving Donnelley with 46,000 employees.
Management continues to cut away at excess costs, like when they recently traded in their plush Chicago offices for more modest accommodations. Donnelley announced the sale of its Peak division, in January 2005. Peak provides integration, maintenance and consulting services related to automatic identification and data collection systems and hardware. For the nine months ending September 30, Peak lost US$5.8 million, on sales of US$135.2 million. Commenting on the sale, Angelson said, “We continuously evaluate our businesses for strategic fit. We have concluded that, although Peak is a valuable business, it is not central to our strategy. We will, therefore, seek alternative methods of optimizing the value of this unit.”
Anyone who lived through similar cost-cutting exercises at Moore or Wallace could have foreseen what was lying in wait for the folks at RR Donnelley. The company did need some financial discipline. Before the merger, RRD had been struggling in a very competitive market. Moore was in a somewhat more precarious position, having seen a string of unsuccessful CEOs grapple with being the dominant player in a declining forms industry. Now Angelson finds himself at the helm of the largest printer in the world, and I am willing to bet there will be significant changes in the coming year.
Remember that US$100 million in savings he promised in the first year? Well, by August, he was musing about the long-term savings being closer to US$300 million. Do not bet against him. He also once said he would grow Moore Wallace into a US$10-billion company and he is just a fraction – or an acquisition or two – shy of that ambitious milestone.
A clear sign of confidence in Angelson’s leadership came in January 2005, when Donnelley management announced they were buying back US$200-million worth of Donnelley shares from a major shareholder. Share repurchases send signals to the market about management’s belief of the true value of their company. If the managers are buying back shares, it suggests that the view from inside the company is optimistic. And there is good reason to be optimistic, again, looking at the impressive results in the company’s first year of the integration.
Of course, there are still some black clouds. As I mentioned, the forms business that was brought over in the February 2004 merger continues to suffer, as alternative media takes the place of traditional forms. The hard truth is that no amount of vigilance on the cost side will solve your problems if you have no customers for your product.
Other areas of the company look healthier by comparison, but they all continue to suffer from soft prices. Once again, even from its position as the largest printer in the world, Donnelley cannot influence prices. Which begs the question whether RR Donnelley will be making any more acquisitions? The entire printing industry is ramping up for another dramatic period of consolidation, whether because of the glaring techonology gap between companies, the looming retirement and succession of many significant players, or stratgic vision. Clearly, as the new big boy on the block, RRD has a vested interest to stay out in front of this trend.
You need look no further than the transcript of the Moore Wallace/RRD merger conference call to get a hint. Responding to a question about further acquisitions, Angelson said, “Going forward, we have spoken about this as an industry that needs to be consolidated. There is US$160 billion in revenue out there. After this combination is completed, we’ll only have eight or so of them. It leaves a lot of opportunity going forward, and we’ll get back to you.”
There is a lesson for all printers to find from the way in which Angelson has rewritten RRD’s story. In the face of soft prices, and eroding markets for some key segments, RRD has posted reasonable revenue numbers and much-improved profit numbers. It has done so solely on the strength of a management team willing to make difficult decisions and remain aggressively cost conscious. Controlling costs is not the entire story for any business, but it will go a long way in providing the flexibility needed to take advantage of new opportunities – before your competition.
Copyright Youngblood Communications Co., Ltd. Feb 2005
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