Printing merger won't rev up presses
Donnelley
deal only adds capacity
By Bob Tita
December 08, 2003
A pending merger will make R. R. Donnelley & Sons Co. the
biggest printer in North America, but not big enough to escape the
cyclical woes of the printing industry.
Like all printers, Chicago-based Donnelley and merger partner Moore
Wallace Inc. have high fixed costs tied up in their massive printing
plants. Those costs weigh heavily on the bottom line when demand for
printing slackens. Profits rise only when good economic times keep the
presses rolling longer.
Donnelley doesn't disclose its capacity utilization figures, but the
industry wide number is down 23% from its peak in 1999. Presses were
running only 103.3 hours per week on average during the third quarter,
out of a possible 168, according to the Arlington, Va.-based trade group
Graphic Arts Technical Foundation and Printing Industries of America.
Donnelley has shared the industry's pain, as annual profits fell 54% to
$142.2 million between 1999 and 2002. Toronto-based Moore Wallace's
profits are up over the period, largely because the company got bigger
with Moore Corp.'s May acquisition of Lisle-based Wallace Computer
Services Inc.
Observers don't expect the $2.8-billion Donnelley-Moore Wallace merger
to eliminate much excess capacity. Donnelley prints magazines, catalogs,
phone directories and books, while Moore Wallace churns out business
forms. The lack of overlapping business means the merged company won't
be able to cut overhead by consolidating work and closing plants.
"You can keep
buying all day long, but you're just buying more overcapacity every time
you buy," says Charles Oppenheimer, CEO of Amvest Financial Group Inc, a
Missouri-based investment bank specializing in the printing industry. "I
don't see a real ability to integrate the things they do."
Pricing is another chronic industry weakness Donnelley can't escape by
bulking up. In a fragmented industry dominated by small companies, price
cutting is endemic, especially when business is slow. Prices for
printing magazines rose just 1.2% in the first nine months of the year
and are still 3.6% below their 1998 peak, according to the U.S. Bureau
of Labor Statistics.
Donnelley declined to comment for this story, but has said publicly that
consolidating corporate headquarters functions would save $100 million
within two years. It also hopes that the expanded capabilities of the
merged company will help it win new business from existing customers.
©2003 by Crain Communications Inc.
