(The following was the cover story in a B2B forestry management newsletter which I designed, wrote and produced)

The Urge to Merge

By Joe Bergeron

Consolidation has become the growth strategy of choice in the forest products industry

M&A. That's MBA speak for "mergers and acquisitions." Lawyers define it more verbosely: "The absorption of a lesser estate, liability, right, action or offense into a greater one." But you don't have to be an MBA or a lawyer to know that mergers and acquisitions are a common financial strategy in every industry from manufacturing to financial institutions. It seems most companies are either buying, or hoping to be bought. And while the AOL/Time Warner merger may grab all headlines, the forest products industry is hot with a merger fever of its own.

With 26 transactions totaling $60 billion since 1997, few industries have experienced the merger and acquisition activity of forest products companies. And, according to one industry insider, it's far from over. "Surviving companies tend to be healthier and able to provide more stable employment. Better capital decisions will improve overall returns and poorer competitors will be forced out more quickly."

The most significant consolidation was undoubtedly International Paper's $9.9 billion acquisition of Champion International and its $7.9 billion purchase of Union Camp. "IPA is greater than the sum of its parts," says one industry observer. "Their previously distinct and diverse opinions about forest management are now one voice with one agenda. You'll see it manifest itself in industry association meetings, procurement policies and land management strategies." The melding of these three industry giants was preceded by an IPA buying-spree, which included Federal Paperboard, Carter, Hold Harvey,, Zellerbach, Festoon,, Ganders, Aussedat Rey, and Shorewood.

IP isn't the only forest product company in the acquisition mode. Weyerhaeuser's acquisition of MacMillan Bloedel and TJ International for $3.4 billion gives the company a major presence in solid wood. One Industry analyst believes that Weyerhaeuser may soon add Willamette to its stable of companies. "If the Willamette hostile take-over occurs, it will show that even the healthiest companies are subject to be being bought up."

Another significant deal is Plum Creek's acquisition of The Timber Company, owned by Georgia-Pacific. It shows that GP - one of the giants of vertical integration - is willing to sever its ownership of the forest, and move to a non-cyclical business strategy. Although supply agreements are currently in place, they will eventually expire and G P will have to rely upon the open market for its wood supply.

The Sappi purchase of SD Warren and Stora Enso's acquisition of Consolidated Papers make it clear that forest products is a global industry. U.S. companies are no longer immune to the buying habits of foreign corporations. Says one industry insider, " Global consolidation will eventually provide opportunities for manufacturing organizations to be merged and managed globally, versus regionally."

Wood is Split

The picture has been changing, particularly in North America, with market share of the top 5 paper and paperboard producers increasing 24 percent, from 31 to 55 percent since 1990. However, market share of the top 5 producers of wood products (lumber, plywood, OSB) has actually fallen, from 74 percent to 63 percent. With the increasing need to be global, there is an urge to merge according to Kathryn McAuley, analyst with Brown Brothers Harriman & Company, New York. "End-use customers want fewer suppliers and they want them to be global, but supply locally.”

Synergies

Beyond sheer size, there are mutual advantages in virtually every merger or acquisition. One example is transport economies, such as a pulp plant supplying raw material to a recently acquired, adjacent paper plant. And there are other benefits. First, the price paid by the acquiring company is less than replacement cost of the equipment, inventory and other assets. Operations can be made more productive by extending machine runs. The product mix of the two joined companies can be optimized, and duplicate selling, marketing, general and administrative costs can be eliminated. Cash flow can be captured and redirected. And the acquiring company's customer base is expanded.

These synergies can be significant; the acquisition of Champion International and Union Camp represented $850 million in merger cost savings and synergies to International Paper.

Assets of the combined companies, like land holdings, are viewed with a critical eye. ''Acquired land is being looked at closely for its strategic fit, and areas not deemed strategic are sold off. This is creating opportunities for potential land buyers," says one industry official.

Mo' money, mo' money

On Wall Street, size matters. Mutual funds and institutional investors make it that way - a company has to be big in order to get picked up by their investment radar. A low return on capital in the industry has been a major driver of the consolidation trend, according to Morgan Stanley Dean Witter. The 10 year average return (market capital) in the paper sector has been just 8.6 percent. Since 1995, indexed prices of the S&P 500 have risen 219 percent. In that same period, stocks in the paper sector rose just 33 percent.

The capital markets are pressuring publicly traded forest products companies to ramp up their return on investment. "Returns on capital have been miserable over the last 15 years because of cyclical supply and pricing. Industry leaders have surmised that, unless some discipline is established concerning capacity and pricing, future capital will be hard to come by," says one industry insider. "Consolidation allows strength to influence capacity and pricing decisions. With size comes significant influence in supply chain management and leverage of purchasing practices."

In addition to benefits to shareholders, consolidation should be good news for consumers, too. "Consumers are getting a more efficient, albeit, sterile marketplace. The larger companies are more environmentally responsive, but they're also bigger targets for attack by the environmental movement. Certification programs - like the Sustainable Forestry Initiative (SF!) - are being driven through at light speed by the big companies," says an industry observer.

Impact on timberland owners

According to Rob Morrow, VP of Business Development at Resource Management Service, Inc., and a specialist on private landowner issues, consolidation of the industry is presenting new challenges for private, non-industrial timberland owners. "Bottom-line, there will be fewer buyers for your timber. That will drive down prices, at least for the short-term. But, as in virtually every sales situation, the buyer/seller relationship is extremely important.

Landowners who don't have the time or tendency to develop relationships with buyers should think about aligning themselves with a strategic partner who already has the buyer-relationships. A good strategic partner can find buyers for your wood and generally get you a better price. They can also help you deal with certification issues that could otherwise hinder the sale of your timber," he says.

What's down the loggin road?

Further consolidation of the industry is inevitable. In addition to mergers and acquisitions, new, strategic alliances of forest products companies will playa role in global marketing of wood products. An online paper and forest products marketplace, jointly developed by International Paper, Georgia-Pacific and Weyerhaeuser, is a clear indication of things to come. By working together to establish an electronic marketplace, the companies believe they can benefit customers by simplifying transaction processes, improving information flow and increasing speed of delivery. The companies say that by providing both procurement and sales functions, the online marketplace will enable participating companies to streamline purchasing operations, reduce inventories, cut internal costs and increase efficiency in the industry.

Doug Hayhurst of PricewaterhouseCoopers says that institutional investors believe that companies focused mainly in one product area are more likely to succeed. "The push is there from big investors for pure plays. So a lot of M&A activity comes from forest product organizations buying and selling assets to one another as they slim down their product line to concentrate and specialize in one or two areas."

According to Brown Brothers Harriman & Company's Kathryn McAuley, the industry's global makeover has only just begun. "There is an awful lot of consolidation ahead of us."

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Preface: The following was written for Cobb Power’s annual report.)

Two Golden Wires

By Joe Bergeron

Martha Dozier remembers the night the lights came on in her family’s small farmhouse in Edison, Georgia. An eight-grader at the time, Dozier recalls how electricity changed her family’s life. “ From 1936 until 1941, we powered our lamps and water pump with a Delco battery my grandfather set up in the barn. My mother did her cooking and heated our bath water on a wood stove, and the local iceman would bring huge blocks of ice every few days for our refrigeration.”

On Tuesday, August 26, 1941, all that was about to change.

The Calhoun County News reported it this way: “Two Golden Wires… Monday and Tuesday two golden wires were strung up on the long awaiting line of electric poles out Bluffton Road. The residents have been anxiously awaiting for months to see electric lights coming their way, and at last light has come! All are happy now, for in a few days those two golden wires will pour a steam of light and power into many homes to brighten and make happy.”

It seems ironic that a town named “Edison” would have to wait until 1941 for “two golden wires,” when much of the country had already been enjoying the benefits of electricity for nearly 40 years. According to Dozier, it’s not as ironic as it seems. “Actually, the original name of the town was Pachitla. In 1905, the townspeople voted to change the name to Edison, with the hope that Thomas Edison would be inclined to send the town the necessary funds to bring electricity to the area. The money never came, but the name stuck,” she says.

Dozier is the matriarch of five generations of Georgia farmers. Her great-grandfather, Andrew Coleman Sanders, a Civil War veteran, settled in Edison in 1870 and began growing cotton. Her grandfather, Kenneth Norton Sanders, continued the tradition, and his daughter, Nellie, was the first female farmer in the area.

Today, the legacy continues.

“The relationship between a man and his land is like a marriage,” says Connie Dozier, Martha’s daughter-in-law. She and her husband Dave run the 3,000-acre family farm near the original Dozier homestead, growing cotton, peanuts, corn, wheat and oats.  “It’s challenging at times, but once you work the land, it becomes part of you. The land becomes a member of the family.”

The technology that first brought electricity to Edison has evolved into sophisticated, high-tech solutions that help keep electricity an even better value than it was years ago, according to Barry Satterfield, Manager of Apparatus at Cobb EMC. “In 2006, we installed an automated meter reading system (AMR), which allows us to monitor our members electricity usage remotely. From our Marietta office, we can read each customer’s meter every hour, providing a snapshot of their daily usage, helping us diagnose any problems and allowing us to connect or disconnect the power right at our laptop,” he says.

Today, there are five generations of this family who have benefited from the “two golden wires.” According to Martha, “Cobb EMC does a great job for us. Electricity is a better value today than it was in 1941. It’s one of those things that people take for granted. But when you’ve grown up without it, you appreciate the value and convenience it brings.”

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The Cobb EMC Family Legacy

By Joe Bergeron

Jean Lawson

Jean has been a member of the Cobb EMC family since 1973. “I’m a second generation employee. My mother, Lucile Turner, was a billing clerk for the company for 30 years, starting in 1945,” she says. “I wasn’t sure that I wanted to work alongside my mother, but it happened when I joined the company as a part-time employee in the bookkeeping department. She made me toe the line. But she taught me a lot.”

Jean remembers the eight-party telephone line in their Marietta home. “We got our first telephone when I was eight years old. Cobb EMC customers would sometimes call my mother at home about their bills or other issues… that was my first lesson in customer service. Mother knew her customers by name and went to great lengths to resolve their issues.”

Customer service technology has changed quite a bit since Jean’s mother’s days, according to Bob Arnett, Vice President of Technology Services. “We evolved from a switchboard and handwritten journals to an Information Technology department. Recently, we changed the name to Technology Services – with an emphasis on services. Our customers are actually other Cobb EMC employees,” he says. “We provide the technology that helps Cobb EMC customer service, marketing and field personnel do a better job for customers. Not too long ago, it took 52 separate steps to generate a bill that included electric and gas usage. In our new system, it takes 3 clicks. This efficiency translates to faster, better service for Cobb EMC customers.”

There were 43 Cobb EMC employees when Jean joined the company. Today there are more than 400. “Over the years, I’ve known five General Managers and made the transition from handwritten journals to totally computerized operations,” she says. “One thing that hasn’t changed is the commitment we have to our customers – and to each other.”

Jean remembers going to her first annual meeting of Cobb EMC shareholders with her mother. “I wore my best Easter dress and passed out programs as people came in,” she says. Carl Hamby, Cobb EMC’s General Manager at the time, gave Jean a quarter when she came into the office with her mother. “That was a lot of money back then.”

Jenni Kemp Gross

Jenni’s family has deep roots with Cobb EMC. In addition to being a full-time dairy farmer, her grandfather, Clyde Kemp, Sr. served on the company’s Board of Directors as Secretary and Treasurer from 1939 until 1975. “He lived for this company. It was his passion – it was his love,” says Jenni.

Jenni’s dad, Clyde “Hugh” Kemp, Jr., often accompanied his father, as they drove the dusty, unpaved roads of West Cobb County, going from farm to farm, collecting the $5.00 electrical hookup fee. Later, Hugh worked in the “Right-of-Way” division, which was responsible for making preparations to bring electricity to the farms in the still-rural area.

Currently an Administrative Assistant in the executive office, Jenni joined Cobb EMC in 1994 as a Customer Relations representative. “This is not just a job for me. It’s a family. Cobb EMC appreciates its people and they show it every day.”

Jenni grew up with many of the sons and daughters of the original Board of Directors. “We share a common bond. Our families were responsible for bringing electricity to people who otherwise wouldn’t have had it – our grandfathers and fathers literally changed the lives of thousands of people for the better. Not many people can say that,” she says.

The Kemp family has left a distinctive footprint in their community. The Kemp Library, Kemp Elementary School and a Cobb EMC substation named after Clyde Kemp, Sr., are just part of their legacy.

“I wish my grandfather had been alive to see me join Cobb EMC. I think he would have been very proud,” says Jenni.

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A Leap of Faith

By Joe Bergeron

The faithful came in straw-filled wagons and horse-drawn buggies. Others walked the long, dusty roads of Powder Springs to attend the monthly service at the Lost Mountain Baptist Church in 1878. They sat on hard benches and barrels in the tiny church, illuminated only by tallow candles. During the coldest months, they dressed in heavy coats and gloves, as there was no wood stove. The baptismal pool was an icy spring, so cold in fact, that baptisms weren’t held during winter.

Still, they came.

“These founding Church members left a rich legacy,” says Mike Ford, Director of Outreach & Administration. “From the humblest of beginnings, this group of farmers and merchants banded together to create something wonderful, loving, and lasting.” 

A timeline of the Church shows how far it’s come. In 1878, the first mission offering totaled $4.05. Twenty years later, Sunday school classes began. In the 1940s, electric lighting was added. “The cost of installing electrical fixtures was $37.00, which left $6.00 in total available funds. That paid the power bill for several months,” according to Ford.

In 1952, the first Sunday school wing was built. A few years later, a well was drilled, and a basement and baptistery were added. In 1966, the Church welcomed its first full-time pastor and in the 1970s, a new sanctuary was built. In 2000, the Church purchased 32 acres from Powder Spring’s Carver family and began planning for a new facility. In July 2005, the first service was held in the new 13,000 square foot building.

Today, 1000 members of the Lost Mountain Baptist Church enjoy a state-of-the-art facility that serves as a site for numerous community events. “There are classrooms for preschool age children to senior adults,” says Ford. “We even have multimedia rooms where young members create videos and participate in stage plays.” During the Christmas season, Church members perform seasonal plays in the well-equipped theater, while other members prepare traditional southern fare for the audience and guests from local assisted living communities.

Several members of the Church are also members of the Cobb EMC Women’s Task Force, including Glenda Amason, Hazel Hutchins, Martha Jones, Carole Ocheltree and Pat Copeland. According to past president of the Task Force, Pat Copeland, it’s an active group. “We conduct several activities during the year. One of our main projects is
making a quilt that will be raffled off. The proceeds will be used to send three youth tour delegates to Washington, D.C. Task Force members also operate the concession stand at the annual meeting, selling homemade sweets and food from The Varsity.”  Throughout the year, members of the Task Force give gifts and baby supplies to the Women’s Pregnancy Center, send children to camp, and do volunteer work in local schools.

The Lost Mountain Baptist Church is an integral aspect of life in Powder Springs. “The Church plays an important role in our lives,” says Pat Copeland. “It’s a place to thank God for his many blessings. It’s a place to see our old friends and share memories. And it’s place to meet new friends and share in the bounty of our lives.”

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