Choosing Independence

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Choosing Independence

March 31, 2001 - 20:00

MIKE FLINN, PRESIDENT of Scope Packaging Inc., receives monthly solicitation offers to sell his family's Orange, Calif., sheet plant, but he chooses to remain independent. Why? "We're a family business. My dad and mother would never want to sell this place," he says. "This company supports a lot of families that have worked here for a long time."

Independent converters tend to take on more labor intensive and specialty business, such as this circular stack of diecut corrugated that is hand bundled at Northeast Box.
Independent converters tend to take on more labor intensive and specialty business, such as this circular stack of diecut corrugated that is hand bundled at Northeast Box.

Flinn's father, Bill, and his mother, Judy, started the company 36 years ago. Both parents are still active in the operation of the plant, and their daughter, Cindy Baker, is vice president.

"What would happen to this company if we sold it?" Flinn asks. "Is the business going to be the same afterwards? Are all the people who got us here going to be taken care of and, if we do sell it for what we could, would that be able to support our family?"

In Flinn's case, the decision to keep the family business intact is sacred, yet that doesn't ease the challenge of doing business in today's competitive environment. Being innovative isn't enough anymore, Flinn says.

Because of this, many plant owners struggle with the decision to sell. Unlike any other period in the history of the U.S. independent box plant, today's privately held companies are ripe for acquisition.

A Family Affair - Judy and Bill Flinn own and operate Scope Packaging with their children Cindy Baker and Mike.
A Family Affair - Judy and Bill Flinn own and operate Scope Packaging with their children Cindy Baker and Mike.

"A lot of these companies started in the '60s and '70s when there was that first big round of post-war consolidation," says Steve Young, executive vice president of the Association of Independent Corrugated Converters (AICC). "They have grown into very strong companies."

Many owners are at a turning point in their careers. They aren't getting any younger. In the meantime, their companies are strong and their markets are stable.

S. Young, AICC
S. Young, AICC

"There is a generation getting to a certain age and now saying, 'Now I have to make a decision about what to do with my business," says Jim Ackerman of M.S. Ackerman & Co., Fort Lee, N.J. "Everyone comes up with a different decision based on his business, his personality, his part in the country, and what he wants out of life."

What is an Independent?

By broad definition, an independent plant is one not owning a paper mill. Integrateds, which own mills, include companies like Smurfit-Stone Container, Georgia-Pacific, International Paper, Weyerhaeuser, Mead, Willamette, Rock-Tenn, and Westvaco. Mergers and acquisitions have whittled down the number of integrated companies in the last two years, leaving behind several very large conglomerates.

Despite consolidation among the majors, market share has remained very stable and fragmented. Independent corrugated box plants garner about 24 percent of the U.S. market, with independent folding carton plants representing about 35 percent.

Independent Performance - U.S. Sheet Plants
Independent Performance - U.S. Sheet Plants

"Even though the absolute number of companies engaged in folding cartons has declined, markets continue to grow for paperboard," says Jerry Van de Water, president of the Paperboard Packaging Council (PPC). "The market is close to $9 billion and a much higher percentage of that is supplied by independents than was previously thought up to the late 1990s."

Although they are usually smaller, one or two operation companies, independent corrugated container and folding carton plants are expanding their reach by fine-tuning products and services. This trend sets them apart from integrateds.

J. Van de Water, PPC
J. Van de Water, PPC

"We're seeing a growth of the niche orientation. That's where independents have excelled," Young says.

Common strengths of independents include higher end graphics, specialty display work, and shorter runs. An integrated plant's efficiency point is usually running larger volume.

"The role of the independent has, and continues to be, to serve the market segment where we can be more creative, more flexible and more quickly answer specific customer needs," says Lou Wetmore, president of Triad Packaging Inc., Conover, N.C.

L. Wetmore
L. Wetmore

Bruce Hannibal, president and partner, Northeast Box Co., Ashtabula, Ohio, says, "It's much easier (to compete with integrateds). Most of the business I run, integrateds really don't want to run. They can't handle managing a warehouse like this, delivering everything overnight. They're just amazed anybody can do that. They probably give us more business than they take away. That's where the future of this business is."

Independent companies often are viewed as attractive acquisition targets by larger companies looking to diversify their businesses.

Integrateds buying independents is nothing new, Van de Water says. "Some (integrateds) have a long history of growth through acquisition. People tend to forget that Smurfit began with a small $12 million plant outside St. Louis, and Rock-Tenn was very small before it began its development of an acquisition capability."

More recent examples of integrated companies buying independent operations include Caraustar and Crane Carton (see related story on page 40), Menasha, Package Products, Inc. and Pennsylvania Container Corp., and St. Laurent and Castle Rock Container, which is now owned by Smurfit-Stone.

"Using acquisitions to increase market share is still a primary motivator, but I also see majors acquiring independents for their specialized market knowledge," Van de Water says. "When you look at the Westvaco acquisition of Mebane, they were acquiring the leading producer in the pharmaceutical field, which was always regarded as a stable growth segment because of the aging of the population. If you look at International Paper's acquisition of Shorewood, although that came out as a white knight defensive play, Shorewood is a dominant player in the music and entertainment field with some of the highest margins in the industry."

But it's not just integrateds doing the buying. Independents acquiring other independents has been common over the years.

"The larger independent and integrated companies are still wanting to buy independent plants. We probably get four unsolicited inquiries a month," Wetmore says.

Selling is Serious Business
Selling is Serious Business

"I don't think a week goes by where I don't have somebody beating on my door or writing me a letter saying, 'Would you be interested in selling your plant?'" says Hannibal.

Wetmore noticed buyout interest picking up in July 1999. Although he is still occasionally contacted, he feels no pressure to sell. "Any company that is rocking along and has a halfway decent balance sheet shouldn't be under any duress to sell, and I certainly don't feel any. I'm not going to use the term, 'never.' However, our companies are enjoying some good years," he says.

Steve Warneke, president of Warneke Paper Box Co., Denver, says he receives weekly solicitations to sell his plant, but his answer is always no. "We're 93 years old and I'm proud of what we do here. I love this business," he says. "We're the best there is. No one can get a better box anywhere than they can at this place. If I sell it, that ceases."

Jay Wertheimer, president of Wertheimer Box & Paper Corp., Chicago, agrees. "My company has been a family business for 61 years. We've had people express their interest and desire to buy us, but we're not interested. We haven't achieved everything we're capable of."

Time to Sell

Gary Corte says he wasn't willing to ask his 75-year-old mother to "kick in a few million dollars" to help renovate and upgrade Aero Box Co., his family's 35-year-old corrugated sheet plant. Instead, he decided to sell the company to Greif Bros. five years ago. He says he has never regretted the decision.

"My mother and I were coming to a crossroads as to whether we wanted to get larger," Corte says. "We had been profitable for years, and I knew we would be an attractive company."

Corte contacted Greif, the parent company of his sheet supplier, Michigan Packaging Co. Greif agreed to buy Aero Box, sign Corte to a three-year contract and allow Aero to keep its name. Corte has since extended his contract to continue as general manager.

"Greif has allowed us to maintain our identity," he says. "People know us by name. They wouldn't know us by Greif. I don't see how it could help us by changing our name."

Corte admits that selling is not an easy decision and usually requires a lot of number crunching and soul searching. "It was almost to the point that if you just took the money and invested it, you would probably make more money than you would being in the box business.

"If you disregard the love that you have for the business and the company, you can say, 'In 20 years this entity, this pile of money would be worth roughly x amount if we did it this way, or x amount if we did it this way," he says.

Another factor Corte could not overlook was the fact that the acquiring company had deep pockets.

"The noteworthy change for me was I had big brother behind us," he says. "Just in the last year-and-a-half, we really grew."

When Greif acquired Aero Box, the company did not need new equipment. "We were well-equipped at the time. Greif had been after me to do some capital improvements and put in a capital budget. Being a small company and family owned, we never did those things. We never mortgaged anything, we paid cash for everything. I kept telling them 'I'm all set, there's nothing I need,' and they said, 'You've got to submit something," Corte says.

As a result, Greif spent more than $5 million on capital improvements, including two new flexo folder-gluers, load formers and a building expansion.

More Competition

Those plant owners choosing to remain independent face a unique set of challenges. For one, independents are finding themselves butting heads with companies previously posing little competition, especially from larger firms.

"When integrateds are merging and consolidating, they become bigger and more powerful, and have tremendous advantages in some ways over the independents in that they have multiple locations all over the globe," Wetmore says. "Most independents are one, two or five locations. Not many have 40 or 50 locations like the integrateds."

Shipments by Company Type
Shipments by Company Type

Another advantage a large company has is what Mike Flinn of Scope likes to refer to as one stop shopping.

"Right now I really believe it's the way that we're going and the way that the world is. Everybody is rushing around and we're doing about 500 things," he says. "That person who buys packaging doesn't want to have to spend an hour with the person who sells brown box, the person who sells foam, and the one selling plastic bags. He wants one guy who handles it all."

Another problem is box price. "We're having to lower our prices considerably," Wetmore says. "Smurfit-Stone made it a point to go very aggressively after (one) account. I wish they hadn't done it. However, I don't think for one minute that Smurfit-Stone is out to get me. They're just trying to get some more business, and that's all I'm trying to do. If they can do it for less money than I can, then I have to walk away from it."

"The frustrations of the independent are getting bigger, bigger, bigger," says Warneke. "When they were big, your Tenneco's, your Smurfit's and Rock-Tenn's were all after that big work, and independents were not interested. We kept apart pretty easy. Independents took smaller, higher quality products, and did the odd stuff the majors didn't want to do. Now bigger companies are buying smaller independents that were very high quality, doing the same work we do and putting their name on it. With funds behind them, they're going after work that they do at whatever price they have to to keep their plant busy.

"Right now we have a major customer that we used to compete for business with Ivy Hill, when it was family owned," he continues. "When Time Warner came in, they dropped the price 35 percent to take $2 million away from us. We knew they were losing money. Time Warner didn't care."

There are 50 employees at Warneke's family owned and run folding carton plant. He says remaining independent is an advantage from the standpoint of employee commitment.

"That's the only advantage I have," he says. "Shorewood and Ivy Hill were good companies, but now they're owned by some AOL. Do those people really care that much as they did for the family when they owned it? I doubt it. Our advantage is, our people still care and put out a better product."

However, some independents view consolidation as a major plus. "It creates more opportunity for me," says Wertheimer. "The bigger companies, through consolidation, are returning to their age old agenda of high volume and big business, creating an opportunity for independents to provide our product which is not just corrugated."

Here to Stay

The fact that little has changed in independent versus integrated market share is testimony to the fact that smaller companies are secure in this market.

"Independents are alive and well and will remain alive and well," Van de Water says. "Independents these days can play with the big guys. The playing field has been leveled. One example is the rapid evolution of IT capabilities. A very small independent, for a reasonable sum, can acquire capabilities close to those of the major integrateds."

It's all about human enterprise, Young says. "Individuals will always want to do something for themselves and that's why you always have independent businesses. Part of our job at AICC is to encourage (members) to remain independent, but that's got to be an individual choice by every owner."

No matter the business climate, opportunity is always just around the corner, Wetmore says. "The era that we're getting ready to enter right now is ripe with opportunity for independents and integrateds alike. I'm excited about it. I think we're going to have a good four- to five- to seven-year period."