The debt has been pushed off the balance sheet. Now we wait to see the new game plan
I HAVE BEEN ASKED for my opinion on the new Worldcolor (formerly Quebecor World), so here it is. For me, this is a complex story of mixed blessings. I spent most of the 1990s as part of Quebecor World where I met and made many good friends. I also saw how the founder, Pierre Peladeau, made things happen. This was a man who had a “brain and stomach that matched.” He had the gut feel to take the big gamble and the brains to cover his bets. He understood the complexities of the industry and business, and he surrounded himself with sales executives and accountants. He knew good advice when it came his way and he was not too proud to take that advice. He knew he needed strong sales reps to get the organic growth, and he needed strong accountants to manage the high debt and work the synergies from acquisitions until they paid dividends. The old man, as we fondly referred to him, saw the downturn coming in the early 1990s before most. He started running a lean operation, demanding cost savings from managers long before his competitors did.
In 1992, Quebecor became a public company. It was a crazy, exciting time. However, five years later, the old man died and was succeeded by his son Pierre Karl Peladeau. For me, it was the end of an era. If you’d like a follow-up story on Pierre Peladeau and his management philosophies let me know and I’ll do a follow-up article.
At Quebecor World, we saw RR Donnelley as our biggest competitor. We wanted to be number two behind them. Donnelley was a 100-year-old American company when it went public in 1956. At that time, Quebecor Printing was a two-year-old Canadian company based in Montreal. Yet, by the 1990s, Quebecor had become large enough that we compared ourselves to Donnelley on a regular basis. We saw it as a professionally run but stodgy company that went after large contracts but did not pay much attention to building a great sales force. We thought of Quebecor as an entrepreneurial, crazy place with lots of action and lots of debt. We thought we were the “business and sales professionals” squaring off against the “business and manufacturing specialists” from Donnelley.
Both companies wanted to be global players. Quebecor had a Canadian base that set out to dominate North America and Europe, as did Donnelley, but Canada was not significant enough to even be on the radar screen for Donnelley.
THE NEXT GENERATION
When Pierre Karl Peladeau took over Quebecor World from his father, he continued the dream and, for a while, Quebecor World became the largest printing company in the world.
The next part of the story I tell from the outside as I had moved on to other ventures. Pierre Karl Peladeau was, and is to this day, seen as a deal maker. He is a very smart man but did not seem to see the value in having advisors. He is viewed, maybe not fairly by outsiders, as someone who was more interested in getting an extra point out of a loan arrangement than realizing the dangers of over- paying for acquisitions, or realizing the value of investing in new equipment and systems. He wasn’t able to drive the organic growth or get the synergies out of acquisitions in time to get ahead of the debt. But, Pierre Karl Peladeau had to face the full onslaught of digital printing, the impact of the internet, falling print volumes, eroding margins and many other challenges that weren’t present to the same degree in the 1990s. By the time Quebecor World saw how competitors like Donnelley and Quad Graphics had successfully invested in new technologies and entered new niche markets like direct mail it was too late.
The massive investments in technology and retooling by the company in the mid 2000s missed the mark. The trick to generating a return on new capital investments is to maintain the savings for the company rather than passing the savings to the customer. Unfortunately, in a highly competitive market, customers, especially the large sophisticated print buyers that Quebecor preferred to deal with, expect the savings from capital investments to be passed on to them.
Quebecor lost momentum. Organic growth stalled. There were no further acquisitions. In my view, you grow or you die and the lack of growth was killing the company. The well-publicized CCAA/Chapter 11 filing was the largest case filed in the U.S. in 2008 after Lehman Brothers. At one time the company had more than 50,000 employees; today it probably has less than 20,000, while Donnelley has more than 60,000 employees around the world.
Quebecor World finally emerged from bankruptcy under the name World Color Press, later changed again to Worldcolor. It’s ironic for those who believe that the beginning of the downfall was when Quebecor overpaid for World Color Press—yet the company now bears that name.
So now what? The CCAA/Chapter 11 filing gave the company the opportunity to get rid of some debt and buy some time to develop a new game plan. Let’s hope it has emerged from bankruptcy to be more than the “same old gig with a new name.”
I’ve done an analysis of Worldcolor using the Jump Matrix we’ve developed at BRS Jump, my consulting business. We can view the future of Worldcolor in terms of two main dimensions: the external marketplace, and the internal situation at Worldcolor.
External Situation: Worldcolor is stuck in declining markets
The printing industry is a very large, mature and, in many parts, declining sector. It’s characterized by a few large players like Worldcolor and RR Donnelley co-existing with thousands of small regional printers. The key driver is advertising revenues, which are being siphoned off into new technologies, such as the internet and cell phones. To make matters worse, Worldcolor is in the commodity game, where it often does not control price, and margins are paper-thin and declining.
In addition, printing is one of the first sectors to be hit when the economy turns, and magazine revenues are down this year alone by some 20% to 30%. Other product lines like catalogues are threatened by online advertising and, if the newspaper business doesn’t recover, the flyer distribution business will be affected.
Internal Situation: Flip a coin
The good news is Worldcolor has parked some of the debt that dragged it down for so many years. The bad news is, most of its executive team has changed in recent months. The CEO and CFO who took Quebecor World through the reorganization process have resigned. The board consists of dealmakers and business people, not printers. You can have all the dealmakers in the world, but it’s the production and sales people who create most of the value (is my bias coming through?).
The better news is that after selling its European businesses, Worldcolor operates primarily in three geographic areas: U.S., South America and Canada. The U.S. and South American operations are in reasonable shape.
The bad news is Canada has old equipment and appears to lack the management talent needed to get through these tough times. The worst news is Worldcolor has no perceived competitive edge and if that doesn’t get fixed, I think it won’t have a long-term future.
Winston Churchill, former British prime minister, said that the pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty. Look at the Jump Matrix chart. My guess is Worldcolor will either stay in the bottom left quadrant as a weak player in a weak market or it will strike out and move to the bottom right quadrant and become strong internally despite a weak market. If it stays in the bottom left quadrant—a weak player in a weak market—it will be sold or go back into bankruptcy.
Donnelley made an offer to buy Quebecor World out of bankruptcy and it’s possible that Donnelley could come back with an offer in the future. Worldcolor has the same investors as Vertis in the U.S., so a sale to another company wouldn’t be a surprise. Worldcolor may be a Canadian company but it seems to have a U.S. mindset. It wouldn’t surprise me if at least the Canadian assets are sold sometime in the future.
However if Worldcolor gets organized internally and moves to the bottom right quadrant it could put the deal makers in management to work on a merger, a joint venture or do some creative outsourcing to survive until the company can migrate to more attractive market segments.
Worldcolor, like the “rise of the phoenix out of the Quebecor ashes” is a complex story. It is a story of global printing giants. It is a story of families in business versus professional managers. It is a story of entrepreneurship and sales focus versus investing in technology and manufacturing to survive in a mature market. It has all the elements for a business school case study that students and professors can dissect and drool over for decades, and there are many lessons to be learned and some need to be re-learned—“until death us do part!”