NewPage, in removing three top level executives, is big news these days. I find this situation fascinating. Why the shake-up, and why now? The big question is viability. Would Cerberus release its three top people before declaring bankruptcy? Maybe… I hope to offer possible explanations later this month. In the meantime, let’s look back and review NewPage strategies that made the company what it is today. (The photo is a visual description of what Cerberus hopes to be – Google Cerberus)
It is a tough business that we find ourselves in, but Cerberus has made it even more difficult. This private equity company has, over the years, installed non-paper CEO’s who did not understand the business, and did not try to learn it. They attempted to recreate the printing papers industry. That strategy did not work. It is what it is, and management must be molded by the industry, and not vice versa.
When private equity companies first became involved in the paper industry, there was this aura of invincibility that surrounded them. Most in our industry believed that the leaders of these companies were really bright people that would not become involved in the paper business unless there was a way to make it pay. I could never figure out where this undeserved respect came from, and wrote about it in, The Myth of the Mighty and Masterful Private Equity Investorin July of 2008. (If you are not a Reel Time subscriber, this complimentary copy of Reel Time will give you an opportunity to view the work we do.) In this issue, we covered the NewPage strategy specifically as well as private equity in general.
A few excerpts follow, but those in the business will find this analysis (the lead story as well as the Market Review section) from 2008 an interesting preview of what was to come. In the middle of 2008, if you remember, NewPage had been shutting down capacity in an attempt to keep prices moving up, raise its margins to 13%, and then move ahead with an IPO – before the market could collapse on those unfortunate investors about to be new owners of NewPage.
A common view in the paper business is that private-equity investors manage their business better — and differently — than “paper professionals”. Many are convinced that some special power emanates from all that money that was invested to buy paper assets. Any group or person with that much wealth must be smart. They must see some way of making money that the rest of us overlook.
In recent months, I have heard the following sentiment expressed by a number of people in regard to the market control of NewPage, with perhaps some assistance from Verso. “These guys are different. If they can’t get their pricing they will just shut machines down until they do. They don’t care.” …
Let’s be direct. Private-equity management is not synonymous with good management…Excess liquidity has not only contributed to the housing bubble, it’s also resulted in an increased rate in failures of private equity investments. There has been so much money available to private-equity companies that selection standards have become less stringent…
Private-equity companies are accustomed to evaluating the quality of management teams. Some of them looked at newsprint, publishing, printing and paper manufacturing, and decided that the problems in these industries were fixable — all that was needed was management not tied to the past, i.e., a management willing to break with tradition, consider new ideas and think “outside the box”.
It baffles me that so many in our industry have this reverence for private equity. Has there been a successful private-equity investment in our related group of industries over the last fifteen years..?
Private Equity Companies are Managed Differently – particularly those with a short-term focus. Cost-cutting is typically deeper. Pricing might be more aggressive. Ownership knows less about the business they are in, and can become overly involved in making strategic business decisions…
What they cannot control, however, is their [NewPage and Verso] overall financial performance. The cost to NewPage of closures and market elated downtime announced in 2008 will be substantial. But these costs will be a pittance in comparison to the market related downtime it will incur in coated groundwood late in 2008 and into 2009…
If successful in this endeavor [holding on to the July 2008 price increase], NewPage will establish the current lower level of consumption as more or less permanent. It will also continue to subsidize at least one competitor looking for a way out of the business. In effect, NewPage is choosing to compete with its customers rather than with its competitors. This strategy will also result in NewPage taking the vast majority of downtime by year-end 2008. Verso might help some, but NewPage should expect little assistance from anyone else.
The Cerberus management of NewPage has been inexcusably poor, but even if management had done everything right, the company would not be prospering – its financial leverage is just too great for the current environment. This brings to mind that classic line from the movie War Games…
Strange game professor… the only winning move is not to play.
I feel vindicated today. I quit buying from NewPage a few years ago. I had been a very loyal customer. And a low maintenance, non-abusive one also. We always paid on time for the product we received. But then, almost overnight it seemed, there was a very obvious shift in their business practices and attitude. And when I pushed back on a refused, but very valid small claim, there was a definite “the customer is always wrong” attitude. I gave them the ultimatum. Either honor this claim now, or as long as I am in this industry, I will never again buy another NewPage product unless forced to by a customer. They chose not to honor the claim, which was a mere pittance compared to the volume I moved. I’ve contended from that day that they only answer to the investors, not to the customers. I’ve also honored my end of the bargain. I’ve found true partners in other mills that know the value of good reciprocal relationships with customers.
I’d offer something to NewPage that my mother told me repeatedly when I was young. You’ve gotten too big for your britches!