Inside a Strategy-Driven Turnaround

Watermill Group details how it became the successful owner of North America’s only producer of recycled coated mechanical paper

By STEVEN KAROL, Watermill Group

M&A professionals often tout the importance of strategy in turning around or growing a business. But the effects of strategy are notoriously hard to isolate, as it rarely operates alone. A recent turnaround engineered by Watermill Group, however, provides a rare opportunity to examine the power that the right business strategy can have on a distressed company.

In November 2009, Watermill acquired Madison Paper Co.’s mill in Alsip, Illinois, near Chicago. By most traditional measures, the Alsip paper mill did not look like a sound investment.

Another prospective buyer had already walked away, and the Alsip mill’s European owner, Myllykoski Corp., was keen to divest the plant and close a deal. We acquired the plant for favorable terms – below liquidation value, in fact. Watermill became the owner of North America’s only producer of recycled coated mechanical paper, the type commonly used in catalogs, magazines and advertising inserts.

Watermill believed Madison’s recycled product differentiation could be parlayed into profitability. After all, Fortune 500 companies were going green, adopting corporate social responsibility (CSR) programs mandating the use of environmentally sustainable materials. Despite the paper industry’s general decline, we saw opportunity in the broader societal movement toward green products and companies. Environmental stewardship would anchor our turnaround strategy.

We installed a new CEO who understood our environmental sustainability strategy. In fact, he had recently completed a successful turnaround at a major commercial office furniture company, where green positioning had played a key role. We also gave the paper company a new name and brand identity to help it get a new start. Thus, FutureMark Paper Co. was born. Its mission: to transform recycled coated paper into a valued green product in what was otherwise a commodity market.

Many paper industry veterans said achieving this goal would be impossible. Our initial customer research told us the same thing. During the due diligence phase, we had studied perceptions of recycled paper among the mill’s existing ecosystem of brokers, printers and other paper specifiers. We learned that traditional buyers generally chose paper based on price. The environmental characteristics of the paper mattered very little. Furthermore, many buyers held onto decades-old beliefs that recycled paper is a second-class product that could never compare in quality to “virgin” paper made from trees.

These findings seemed damning. But because they seemed to contradict the larger green and corporate social responsibility trends we observed, we dug deeper. Would paper selection criteria be different if other parts of the customer organization were involved in the purchase decision? Were people’s opinions of recycled paper based on current realities or on recycled products they may have tried 10 years ago?

To learn more, we talked to decision makers who represented our optimal “green” customers. We discovered that business executives valued recycled paper far more than their procurement departments or production staff. The same CEOs mandating that new offices should meet the LEED environmental standards were also pushing environmental goals throughout their companies. Magazine publishers and editors, as well as marketing executives at national retailers, favored using greener paper to help burnish their brands among advertisers and consumers. Furthermore, business leaders favored recycled paper over other environmental paper options because their customers readily understood “recycled” to mean “green.”

We helped FutureMark Paper revamp its sales and marketing efforts accordingly. The new CEO met with top customers to educate them on the environmental and reputation benefits of using the company’s recycled paper. Salespeople called on corporate customers known to have strong sustainability policies. Marketing programs created pull-through demand from end customers by targeting sustainability executives, publishers, editors and advertising directors. And we formed unexpected alliances, reaching out to traditional paper brokers to talk to them about how selling FutureMark paper could set their own brands apart.

By the end of its first year, FutureMark Paper had gained 50 new major accounts with companies known for their sustainability, including American Airlines, DIRECTV, HomeDepot, Staples, Wal-Mart, Macy’s and Whole Foods Market. FutureMark Paper went from selling week-to-week in the transactional spot market to filling its production schedule with months of advance orders – mostly from loyal customers who value the environmental benefits of its recycled paper.

The importance of this shift cannot be overstated. FutureMark’s new customers are willing to buy on a pre-order or contractual basis to get preferential access to the recycled paper they value. Their advance bookings minimize the need to sell excess inventory on the spot market, which is brutally price-driven. As a result, FutureMark Paper achieves average selling prices 2% to 5% above the industry’s reported average – a result of raising customer loyalty,not raising customer prices.

FutureMark’s green business strategy also proved to be rewarding on the operations side. All capex and R&D decisions were scrutinized through the lens of environmental sustainability. Programs that advanced the company’s efficiency and environmental stewardship became priorities. As a result, FutureMark Paper became the first North American paper manufacturer to use an innovative cornstarch-based “biolatex” in its commercial production process. The biolatex displaced petroleum-based chemical binders, reducing carbon emissions equal to taking 8,000 cars off the road each year. In addition to lowering the environmental impact of its supply chain, FutureMark Paper’s switch to biolatex resulted in cost savings of nearly $1 million per year.

The management, marketing and operational changes Watermill implemented for FutureMark Paper were entirely strategy-driven. All major programs aligned behind our green business plan. The environmental focus not only brought discipline to decision-making, but it also attracted a top tier management team and accelerated the changes needed to achieve the turnaround. The mill is now consistently operating at full capacity, and a year-on-year comparison of our first quarter of ownership with our most recent quarter shows a revenue gain of nearly 40 percent.

This article was originally published by MERGERS & ACQUISITIONS JOURNAL .

October 13, 2011