Vertical Integration (CONT’D FROM PAGE 18)
Integration today is a losing proposition, a superficially compelling but tangential and not especially a powerhouse solution to a very simple outsourcing supply problem. “A solution that has already cost shares of equity much more than it can be expected to return. Call it “the curse of inte- gration.” Clearly, the high tide of integration and its market disruption has changed, washing many of the weak legacy swimmers further out to sea, or at least diminishing their pricing prowess. In Response The big American producers are still focused more on integration as a “silver bullet” with M&A growth capabili- ties. European and Japanese companies have an historical lack of excessive vertical integration that provides unique flexibility. But that is changing with seamless outsourcing in the computerized global market. Still, the goal for integrated manufacturers is to be lean and have low-cost producer strategies with control of raw materials. Sadly, these diverse companies often have long buying cycles and like to purchase what their rivals bought. There are times when manufacturers have to choose (de- bate) between the amount of in-house production (integra- tion) and how much and where to outsource (purchase). The problem as they scale up is that many systems and structures lose speed and proper response time. The headwinds alter when valued supply chains change criti- cal issues for restructuring risk-averse integration. The hu-
trums in fair-trade networks where myriad of agreements can – and do – change into death spirals. Yesterday’s cost- ly updates are usually obsolete today. Even coordinating the activities of hundreds of key employees and suppliers can generate more than a few missed opportunities. While post-merger integration is a key piece of the puzzle, the best integration planning can’t cure a deal that should never have happened. Only those behemoths M&As that either enhance each sister company’s distinc- tive capacities or leverage those former takeovers – or both – can have fait accompli. Here the sick companies with no adapted cultures usually become part of the indus- try consolidation. Today, four paper mills – though internal and M&A external growth – have a market share of about 80 percent due to the power of their improved vertical in- tegration. Years ago, financial giant, Credit Suisse’s equity re- search said this about how our $182 billion paper and packaging industry has handled the onslaught of integra- tion: “At great expense, container makers have battled their way to higher and higher levels of integration.” Producers in the $41 billion mature containerboard in- dustry who have raised barriers to entry are consolidated, and highly vertically and horizontally unified. And what have most share owners received for all the effort and capital-spending? Very few dividends with ROI risks.
CONTINUED ON PAGE 22
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April 8, 2024
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