In 1840, John Edwards built a sawmill on the banks of the Wisconsin
River in central Wisconsin. It soon developed into a paper mill,
which he passed on to his son. John Jr. built the business into
an economic powerhouse, and, in commemoration, his statue now stands
in front of the sprawling mill that dominates the town, Port Edwards.
The statue and the large white letters on the mill's brick smokestackNEPCO,
or Nekoosa-Edwards Paper Co.are two of the town's most visible
reminders of paper's deep historical roots and the prominence of
local paper magnates in this part of Wisconsin.
But roots are shorter these days, and paper is no longer local.
NEPCO was long ago transformed into Great Northern Nekoosa (GNN),
and 10 years agoin the paper industry's first hostile takeoverGNN
was bought out by Georgia-Pacific, the Atlanta-based forest and
paper giant. Since then, like a slurry of wood pulp coalescing into
sheets of paper, the hundreds of small companies that have comprised
the U.S. paper industry since the 1800s have been merging with unprecedented
The trend has begun to concentrate a highly fragmented industry.
In 2000, the top five paper companies accounted for 34 percent of
total sales among the industry's hundred largest companies, up from
28 percent in 1998. And nowhere has this consolidation had greater
impact than the Upper Midwest (see sidebar).
Paper mills built over a century ago in Minnesota, Wisconsin and
Michigan, and run by their founders' families for decades, have
been bought by larger corporations. Then, in dizzying succession,
the buyers themselves have been acquired by still larger entities.
The latest big deal blended John Edwards' paper mill still further
into the world of corporate paper heavyweights. In late November
2000, Georgia-Pacific bought Fort James Corp. for $11 billion, creating
the world's largest tissue paper company; Fort James itself was
the result of a 1997 merger between the James River Corp. of Richmond,
Va., and Green Bay's Fort Howard Corp., another of Wisconsin's oldest
This tidal wave of mergers and acquisitions is an effort to combat
poor financial performance by the North American paper industry
and increased competition from low-cost global producers. But while
many corporate strategists and financial analysts believe consolidation
will result in better returns to capital, skeptics question whether
it will be enough to bring stability to the highly cyclical industry.
In addition, labor unions and local communities worry that new owners
will have little regard for their welfare, and some mill managers
seem resistant to the changes that such mergers seek to achieve.
Still, no one doubts that consolidation is likely to continue, and
the few Ninth District paper companies that have so far remained
independent are positioning themselves with mergers in mind.
Behind the trend
The pace of change has shaken the industry"breathtaking"
as one observer put itbut the trend itself isn't surprising.
Some consider it long overdue. One of the primary drivers, according
to analysts and industry insiders, is increased competition from
abroad: the globalization of the industry.
"What you're facing is long-term new entrants from Asia and Brazil
that are much lower cost," noted Anna Torma, senior U.S. paper and
forest products analyst for Merrill Lynch & Co. Foreign competitors
with lower labor and resource costs create "a much weaker global
competitive market position" for paper companies in many grades
of paper, said Torma. "The natural response is for producers to
try and increase their relative market position in North America,
focusing on the largest customers that will be more difficult for
foreign providers to target because they won't be able to provide
the same level of service." So paper companies acquire one another
in order to be able to provide superior levels of service for large
paper customers like OfficeMax, for example.
American paper companies also face global competition from regions
with similar production costs, like Europe, because of the strength
of the U.S. dollar relative to the euro. "We've seen significant
increases in imports over the last two years, 25 percent in each
of the last two years, because of the strength of the U.S. dollar,"
noted Mike Birkeland, communications manager for Potlatch Corp.,
Minnesota's largest paper industry employer. "It creates the opportunity
for domestic buyers to purchase foreign products at very, very competitive
rates based on the exchange factors."
The other major factor behind consolidation is the need to address
investor concerns over poor profitability in the paper industry.
"The principal thing behind this [consolidation] trend is the very
poor financial performance of the industry over the last 10 years,"
said John Hanby, vice president of technology for Potlach in Cloquet,
Minn. "I think that's really the driver."
Merrill Lynch's Torma concurred. "One of the overriding factors"
behind consolidation, she said, "is the cry by investors to have
more profitable long-term outlook if [the industry] is going to
have ongoing access to capital."
For years, paper companies have had low returns to capital relative
to other industries, averaging just over 7 percent in the last five
years, according to a recent industry analysis, compared to over
9 percent in food, drugs and tobacco, and 12.5 percent in chemicals.
Competition from low-cost foreign producers has simply exacerbated
The industry's hope is that through consolidation, paper manufacturers
can shut down less efficient mills and manage capacity more effectivelysomething
the fragmented industry comprised of small producers has been reluctant
to do. Historically, paper mills have seen maximum tonnage as their
goal and have run mills at the highest possible operating rates.
To improve returns, consolidated paper companies intend to bring
supply into better balance with demand at prices set by the global
In essence, to make itself more attractive to investors, the industry
needs to become more profitable, and the only way to do that in
the face of global competition is to seek greater efficiencies by
"We're changing at IP from a belief that every machine and facility
must be operated at 100 percent capacity," said International Paper
CEO John Dillon, at an October 2000 paper conference in Appleton,
Wis. "We call this making more money, not making more tons." For
years, said Dillon, industry earnings have been highly cyclical
"because we choose to operate beyond customer demand, thereby building
inventory and lowering revenue." The industry now hopes to focus
on reducing costs and "finding that 'sweet spot' where production
is most profitable."
"The hope of the industry, and the financial community that supports
the industry, is that by consolidation, these larger groups of companies
with large capacity will be able to manage these supply/demand swings,"
said Dan Temple, a senior consultant at Jacobs-Sirrine Consultants.
In addition, consolidation can lower costs by eliminating labor
made redundant when one company buys another. Marketing, sales and
engineering payrolls can be trimmed in the new corporate entity,
one of the money-saving synergies that mergers and acquisitions
hope to deliver.
Pink slip synergy
In just such an effort, International Paper, the world's largest
paper company and new parent of Wisconsin-based Champion International,
announced in October 2000 (just two weeks after Dillon's Appleton
speech) that it would close three U.S. mills employing 2,500 workers.
Wall Street was delighted, rewarding the company with a 9 percent
jump in share price. "IP shutting down 5 percent of white paper
production permanentlythis is what great companies do," remarked
Bear Stearns analyst Linda Lieberman.
The downside of such synergies, of course, is that people lose
their jobs, and while the IP closures occurred in Alabama, Arkansas
and Pennsylvania, Ninth District workers have also paid a price
when Upper Midwest paper companies have trimmed their workforces.
A number of these reductions have taken place through voluntary
retirement or attrition, and some were under way prior to the mergers,
but the layoffs have had a significant impact in small communities
that have long relied on good-paying paper mill jobs. Overall, from
1995 to 1999, employment in paper and allied industries declined
3.9 percent in Minnesota, Wisconsin and Michigan combined, according
to Bureau of Labor Statistics data. Minnesota saw the biggest decline
(10.2 percent), followed by Michigan (down 5.6 percent), while Wisconsin
had a slight increase (0.8 percent).
"The paper industry has been known [to provide] good jobs, some
of the higher-paying jobs, including salary and benefits, and when
these jobs leave a community that is where the real devastation
can come in," noted Leon Towne, vice president of the Paper, Allied,
Chemical and Energy (PACE) Workers International Union, for Region
10, which includes most of the Upper Midwest. Average hourly wages
for paper and allied industries jobs range from $16.53 in Michigan
to $18.76 in Minnesota.
A more subtle concern is the cultural change created by consolidationa
fear that new owners won't have the same commitment to community
welfare that homegrown owners did. "A less obvious impact of this
trend toward large corporate ownership is the effect on community
organizations and what is often termed 'community spirit,'" noted
the Northwest Regional Planning Commission (NRPC) in its recent
profile of the paper industry in Wisconsin and Upper Michigan. "Plant
managers and senior staff are often very active in their communities,
but frequent ownership change often results in frequent changes
Midwest paper mills tend to have inordinate influence on their
local communities, especially in rural areas, where they're often
the largest single employers. But the NRPC report acknowledged that
"given the global nature of the pulp and paper industry," communities
have limited capacity to influence decision-making on paper mill
operations. The report suggested that infrastructure improvements
and tax incentives might have some effect on corporate decisions,
but recommended that communities look to "diversify local economies
to reduce dependence on the pulp and paper sector."
While job loss concerns are understandable, the fact remains that
older, less efficient paper mills will eventually be driven out
of business by low-cost paper from elsewhere. Takeovers shift the
blame, but they don't change the outcome. And in some cases, the
deeper pockets of new corporate owners have helped modernize mills
that previous owners couldn't afford to upgrade. In Port Edwards,
for example, Georgia-Pacific recently decided to build a new chip
mill, creating new local jobs. Local PACE union president Edward
Saylor said that over the 10 years since Georgia-Pacific's takeover
of GNN, the new management has listened to labor concerns, even
though they're no longer next-door neighbors.
"Before we were taken over, we were family-owned. ... All the
senior officers were local people," said Saylor. "And now we're
operated out of Atlanta. But we've still been able to make contact
with the CEOs and the vice presidents for this area. ... It's been
a good relationship really because they have stuck money up here."
"They built a great big warehouse after they took us over and
they dumped quite a bit of money into us," he added. "And we've
also given them quite a bit back, at the same time. They just shut
down a mill in Kalamazoo, Mich., and so I guess we had to feel lucky
... that we're still running and being profitable at the same time."
Does size matter?
For industry, the big question is: Will it work? Will all the mergers
and acquisitions pay off by cutting costs, reducing capacity and
establishing greater control over supply levels? While the theory
is appealing, observers note that the long-term impact on financial
performance remains uncertain.
"There's been checkered success," said Temple. "The success of
merger and acquisition synergies are still not proven." The leading
magazine covering the paper industry, Pulp&Paper,
noted in its November 2000 issue that "in general, performance for
larger companies has lagged that of small- to medium-sized firms,
based on return on assets or similar gauges." In that same vein,
Michael Shanahan, vice president and managing director of global
resource practices at the Arthur D. Little Inc. consulting firm,
told a recent paper industry conference that "large consolidations
have not improved the outlook for the pulp and paper industry. ...
Companies that seek acquisitions and consolidations aggressively
tend to underperform."
Moreover, it doesn't appear that capacity management, the oft-stated
goal of the consolidation frenzy, has made it through the chain
of command. Pulp&Paper's 2000 survey of paper mill
managers found that 50 percent of them view maximum tonnage as their
primary goal, an increase from 42 percent who felt that way in 1999.
Some suggest that a different sort of culture shock may be in play
here: Merged corporate cultures may have difficulty with internal
Regardless, the consolidation trend seems certain to continue
over the next year, and companies that haven't yet been acquired
are either preparing for it or figuring out how they themselves
can launch an acquisition. Potlach has already begun a cost-saving
program, including layoffs, in what some say is preparation for
acquisition. Tiny Badger Paper Mills, the only publicly owned paper
company headquartered in Wisconsin, seems a likely takeover target.
Analysts also consider Mead Corp., which employs 1,400 at its Escanaba,
Mich., mill, a possible acquisition target. But all is speculation
until the deals are done, and the fact is, virtually every paper
firm should be looking over its shoulder.
"With low-cost entrants coming in, you have two choices," said
Merrill Lynch's Torma. "You can either move up the value chain,
or you can become the largest." Companies like International Paper
have focused on growth, but others may try to develop specialized
paper markets. Boise-Cascade, with operations in Minnesota, has
been able to extend its life span by moving up the value chain.
Other Ninth District paper companies like P.H. Glashalter and Wausau-Mosinee
have long-established market niches that have set them apart from
the current wave of "capacity rationalization."
But for the industry as a whole, the matter of profitability will
remain key to paper's long-term health. "The critical question,"
observed James Robins, an A.D. Little analyst, "is whether the industry
has learned its lesson on supply and demand. Will it refuse to build
inventory in soft markets to avoid driving price and profits to
the bottom? Only time will tell."