(July 14, 2008) — Ten years ago, many U.S. packaging firms tried to “go global” by merging with or buying companies overseas. Now, we can look back and see why many — maybe most — of the deals fizzled.
Expected synergies were not fully materialized. Or the “new” company wasn't able to capitalize on its size, whether by increasing offerings to customers or by getting better prices from suppliers. Customers often had no incentive to change. A decade after the fact, the common thread in these disappointed expectations remains apparent: In many of the deals, there simply wasn't enough value to justify the exercise. And without value, what's the point?
But now, the time seems right to take another look. Is the curtain rising on Act Two of the “going global” drama?
The current scene, in both the packaging industry and the general economy, seems to be more propitious for a truly global enterprise. Most important among the favorable augurs, packaging companies themselves are more worldly wise. They've nailed down their costs and are less likely than they might have been in the past to allow global expansion to create an additional, complicated layer of business bureaucracy and expense — costs that typically can't be passed on to customers via price increases.
Additionally, the economy itself is more global than it was in the late 1990s. Many trends have contributed: liberalization of capital movements, increased deregulation, the emergence of new markets for trade and investment (the role of China as an international supplier and potential marketplace is the big story here, of course) and the immediacy and transparency of information.
The world is flat.
If packaging companies are more ready to play on a global stage, so are their customers and suppliers. Both groups have become more global themselves — in their structures and operations — and are, therefore, more naturally supportive of a global packaging industry.
Ten years ago, many customers (such as large consumer packaged-goods companies) may have been international in name but not really global in behavior, especially in purchasing and procurement. Packaging companies often had to maintain different infrastructures, contracts and trading terms to deal with the same customer's procurement people in Milan, Manila and Memphis. But now, procurement is an increasingly centralized function, and customers value a packaging company that can meet their needs in multiple locations.
At the same time, as companies grow, they look for a packaging company they can trust for global fulfillment. Companies like Coca-Cola Co. and Procter & Gamble Co. need suppliers with broad footprints and diverse products. Uniformity and consistency in product and brand are key — today's firms need a global supplier they can trust to convey their global image, and they are often willing to pay for that added value.
In addition, sustainability is fast becoming a product differentiator best-supported by global companies. With Wal-Mart Stores Inc. carrying the flag, big-box retailers have made the reduction of their carbon footprint a top priority. Retailers and governments, both domestic and international, have cut down or banned the use of plastic bags. It is only a matter of time before this becomes a global standard. Providing global sustainability solutions that go beyond the traditional sales pitch of “low cost” can create a competitive advantage for packaging firms.
Finally, until recently, raw material procurement was driven by regional players. Companies such as Dow Chemical Co. and Saudi Basic Industries Corp. are expanding their global footprint to be one-stop suppliers for ever-expanding packaging companies. This gives acquirers increased volume discounts, more rebates and stable supply streams.
Current market conditions help justify a global merger or acquisition. Global customers are de¼- manding global packaging companies. Global suppliers are providing the cost benefits necessary for global packaging firms. The question — What is the value of this deal? — makes more sense than it might have 10 years ago. Other questions — What added value will the new enterprise deliver to the customer? Will the combined business have greater leverage, not just in procurement but in finance and marketing? — can now be asked with the wisdom that comes from experience.
Will Frame is a managing director and Michael Cohn is an associate with Deloitte & Touche Corporate Finance LLC.