Pivotal Moment

Competitors have got to be concerned about Mail-Well's plan for a new network to serve national accounts.

By Lisa Cross, Business Editor, and Roger Ynostroza, Editor in Chief -- graphic arts online, 3/1/2001

This is a season of change for Mail-Well, Inc., which perfected an aggressive acquisition strategy in the second half of the '90s to catapult itself from a one-plant, $10 million envelope-printing business into a $2.4 billion diversified printing operation with 16,000 employees, 50 companies, and about 140 printing plants operating in 36 states, Canada, Mexico, and the United Kingdom.

On January 31, Mail-Well's acquisition mastermind, Gerald F. Mahoney (pictured at left), retired as chairman and chief executive. He is succeeded by Paul V. Reilly (right), who joined Mail-Well in 1995, a year after its founding, and most recently served as president and chief operating officer.

Reilly is the new president and chief executive. Named chairman was Tom Stephens.

Next stage of evolution

Reilly says he is readying Mail-Well, which is based in Englewood, Colo., for what he believes is the next stage in its evolution.

"I think it's time for us to move from being a collection of well-managed regional companies to being a nationally networked firm cohesively servicing print buyers throughout the country," he says. "We put a lot of effort into building and leveraging our size to gain efficiencies in purchasing and production; now we want to focus on helping our customers consolidate their print purchases by serving as a preferred supplier of integrated services."

He envisions a single, unified operation that can fulfill all of the commercial printing needs of a large national company.

Such thinking has got to be of serious concern to Mail-Well's direct and indirect competitors, which by extension include just about every local printer serving a division of a national account.

"This could be a big opportunity if we can provide large national firms with a level of commercial print products and services that wasn't possible before," he says. "Until recently, there were no commercial printers that could meet all of the print demands of national companies-companies that buy hundreds of millions of dollars in print from thousands of printing companies."

Scale, opportunity, motivation

With $961 million in commercial printing revenues in 2000, Mail-Well has the scale, the opportunity, and the motivation to execute this strategy.

Integral to Mail-Well's success, in Reilly's view, will be developing a compelling business model in which the company's service offering is standardized so that a national client's division in Seattle gets the same level of service as a business unit in Miami. But, he is quick to note, this is not an attempt to centralize operations, but an effort to standardize best practices.

At the same time, Reilly notes, the individual units in the networked organization will have to be autonomous. Deals with national firms will be negotiated and finalized at the corporate level, but service will have to be delivered at the local level.

He says, "The biggest difference is that a local company will be making service decisions based on that customer's importance to all of Mail-Well, not just to that plant."

This change in policy, he adds, will be communicated across the organization and backed by appropriate incentive and compensation plans. "The local plant managers will resolve any conflicts that arise between serving the needs of the national account or a local account," says Reilly.

Strategic review underway.

Determining the best way to achieve this goal-creating a compelling, workable new business model-is the intent of a strategic review of all facets of the business, which is being conducted by senior management, outside consultants, and board members and is due for release in about two months.

"Of course, it would be premature to comment on any progress being made on the review until we announce our final results," says Reilly. "In the meantime, however, we fervently believe that our future is bright and we're very optimistic about the business model we are developing. It's a model that will make us even more profitable and larger in the future."

Mail-Well is already performing very well. It finished its calendar fiscal year with a 28.5% increase in sales, a 6% increase in operating income before special charges, and a 16% increase in EBITDA. "We're going to focus on converting top-line and EBITDA growth into leverage for bottom-line profits," says Reilly.

To improve productivity, the company is already planning to close 11 facilities (both manufacturing plants and offices), replace a dozen inefficient presses with six new machines, and relocate equipment, a bundle of initiatives expected to yield annual savings of $15 million.

Says Reilly, "With these productivity improvements and earnings growth programs underway, we're confident that the financial results will reflect the benefits of these programs quickly."

.but programs continue

The company, now composed of equal-and profitable-parts commercial and envelope printing but expanding its label printing and office document production businesses, is strengthening its holdings in commercial printing (in actual figures, it is likely the nation's biggest company in the segment) and making mid-course adjustments for the next phase of expansion.

It is also launching its Printmailwell.com e-business solution for integrated print management and Mail-Well 1-2-1 customization and personalization program to enhance customer relationship management (CRM), and taking a hiatus from aggressive acquisition to focus on organic growth and streamlining production.

(Still, opportunities arise: on February 20, Mail-Well acquired Communigraphics Corporation of Denver, which it plans to merge with another of its companies to create the region's largest commercial printing facility.)

Aggressive acquisition was basis

From its founding in 1994, Mahoney says, the success of Mail-Well was built on a plan of growth through aggressive acquisition. Specifically, he says, the strategy was to purchase well-run, small to medium-sized printing companies that would be accretive to earnings.

Once it built critical mass, the thinking went, Mail-Well could reap the benefits of economies of scale and offer customers a comprehensive range of printing services regionally and nationally.

Actually, the story of Mail-Well begins before its actual founding. In 1991, Mahoney led a group of investors in the purchase of Pavey Envelope, a printer with $10 million in sales. After the purchase, Mahoney assumed the role of Pavey's president, chairman, and chief executive. Company sales grew to $18 million by 1994.

Two subsequent acquisitions paved the way for the creation of Mail-Well.

In 1993, papermaker Georgia-Pacific offered for sale its envelope division, at the time one of the nation's largest such manufacturers, with 17 plants and sales of about $250 million. With the backing of the Sterling Group, a Houston-based leveraged buyout firm, Mahoney purchased the division, and when the deal closed in February 1994, the resulting company, which had $260 million in sales, was renamed Mail-Well. The company then acquired American Envelope, which had 13 plants and sales of more than $200 million.

Very fast growth track

As Mahoney recalls, "We got lucky in that two very good properties became available and we went after them aggressively. In four years, we went from $10 million in sales to just under $500 million. Some say we overpaid for the Georgia-Pacific operation, but I think it was an excellent acquisition. From what I learned running Pavey, I knew I could turn around that operation and make it more profitable, and I did."

Mahoney's next bold move was to enter the commercial printing market. In August 1995, Mail-Well acquired the Graphic Arts Center, Portland, Ore., a commercial printer with three plants and about $140 million in sales.

"In that deal, as things turned out, we overpaid, but only because of the company's poor performance after the acquisition," he recalls. "Eventually we had to change almost the entire management team. It was a good property, but its management was weaker than we thought. It drove home the principle that our strength lies in having good local managers."

Graphic Arts Center managers' woes began when a lot of new capacity was unleashed: in a commercial printing market served by about 40 webs, eight new presses were started up. The result, of course, was a brutal price war. Local managers were not quick to respond, in the view of Mail-Well top managers, who had to step in to take action to differentiate their offerings, cut costs, and exit unprofitable segments, i.e. publications and catalogs.

Go where the money is

Despite this stumble with the Graphic Arts Center, Mahoney was convinced that commercial printing held vast promise. "Think about it: the total envelope business in the U.S. amounts to a little over $3 billion [at present, Mail-Well supplies 30% of this], but commercial printing accounts for $80 billion in sales," he says.

Still, Mahoney explains, envelope printing and commercial printing are similar: "They're both sales-driven, manufacturing-oriented businesses that compete in local markets. And, in many cases, the people who purchase the envelopes for an organization also buy the commercial printing."

Today, commercial printing is Mail Well's largest product line.

Reflections from the founder

Gerald F. Mahoney is nothing but optimistic about the future of the company he built.

"Whatever happens with the economy this year, the printing industry is going to grow in the long run. And big companies like Mail-Well have an advantage in that they have the resources to buy and to implement the new technology now required to do business."

He says that print is more resilient than many business analysts believe. Mahoney says, "Clearly, one of the things that hurt our stock price and our image was the Internet, as many people wrongly believed that society would no longer need printing. Well, the Internet has not put us out of business; indeed, Internet technology has helped improve our workflow efficiency and communication with customers."

Overall, he believes, ink on paper is and will continue to be a very important form of communication-and a profitable business.

Public pressures

Mahoney notes that managers of publicly held firms, because they must answer to a broader and more demanding group of shareholders that want immediate results, face more intense pressures than their counterparts in privately held firms. Following its entry into the commercial printing market, Mail-Well went public to obtain financing to reduce debt and continue growth through acquisition.

He says, "Sure, we made a few mistakes along the way. When you buy as many companies as we did, it's bound to happen. Still, for the most part we did not overpay for businesses. We followed a very disciplined strategy of paying a fair price."

Mahoney says that the growth-through-aggressive-acquisition strategy still makes sense even though it has fallen out of favor. He explains, "The problem is, many firms that pursued this strategy in the printing industry were not able to successfully integrate the companies they acquired and to maintain the management that made those companies profitable. Also, a lot of the companies failed to squeeze out costs, capture purchasing synergies, and establish cross-selling opportunities."

Strong management team

As Mahoney turns over the reins of the company to Reilly, he is optimistic about Mail-Well's future. He says the company he is leaving has its strongest management team ever, a team poised to propel the company into a new era.

"Last year was a tough one after all; we had a couple of divisions that didn't perform as well as we wanted, plus we came under some pricing pressures. But this team will do what it has to to remain profitable and the company will do well this year," says Mahoney, who plans to stay on with Mail-Well as a "significant and interested" shareholder.