Decline, Part I

Born down in a dead man's town
The first kick I took was when I hit the ground
You end up like a dog that's been beat too much
Till you spend half your life just covering up
--Bruce Springsteen

When I began my career in the paper industry in the early 1980s, business was just starting to ramp after a rough recession. I joined a company that was well positioned for the upturn. Leader in technology, focused product line, talented workforce, seasoned and respected management. We were also strong financially. Zero debt! We financed expansions thru cash from operations (a practice that was unheard of even back then in the paper industry).

Business rocked thru much of the 80s. Those were good times.

Things started to change toward the end of the decade. Strong demand prompted nearly every player in the sector to add capacity. The cost of a new paper machine line with all the trimmings was $200 to $500 million--big money in those days. No one, not even us, could finance these capital intense expansions without borrowing heavily. Exit pristine balance sheet, enter reliance on debt.

In addition, the Europeans were beginning to export product to North America. Penetration was tiny at first, but by the end of the 80s they had scooped 5-10% of the market. Our competitive analysis lab was constantly receiving field samples of paper from European operators we had never heard of.

While the quality of the Euro sheets was pretty awful, the price/ton was irresistable to our customers. In many cases the Europeans were undercutting prices of domestic operators by 20% or more. How were they able to do this? Subsidies. Euro governments targeted forest products as a strategic industry for global trade, and they were offering sweet incentives for operators to pour paper into US markets.

By the early 1990s supply was up huge and competitors were extensively leveraged--a toxic combination in the event of a decline in demand. A general economic recession in 1991-92 dealt one body blow. A few operators began shutting down older machines. As operating cash flows declined, refinancing was necessary to service the debt. All the while, European share was increasing.

Then came the Internet. While we 'saw' the prospect of less demand paper from electronic and small scale publishing, we did not take the threat seriously. In the early 1990s, the spectre posed by the Web was nearly off our radar screens completely.

When I left the industry in 1995, signs of secular decline were becoming more apparent (if one was willing to look for them). Machine closures, some mergers and acquisitions, more debt. In fact, just before I left, my company announced a large acquisition--something that was very strange given that our policy had always been to grow organically rather than thru rollups. And, yes, the acquisition was debt financed.

To an outsider looking in, however, the company I was leaving still appeared healthy. There were no layoffs, in fact we were hiring. Folks were still getting raises. Corporate outreach to the community was strong as ever. The company was viewed as a model corporate citizen, perhaps even to the extent of being a paternalistic caretaker.

Storefronts were occupied. Streets were crowded. Communities were strong.

This vibrance, however, was on borrowed time.

To be continued