Pulp and Paper Canada

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Domtar and Weyerhaeuser’s $3.3 billion deal


August 23, 2006
By Pulp & Paper Canada

In what’s being hailed as an historic agreement, Domtar and Weyerhaeuser are partnering up some of their assets.

In what’s being hailed as an historic agreement, Domtar and Weyerhaeuser are partnering up some of their assets.

Domtar is merging with Weyerhaeuser’s fine paper business, positioning the ‘New Domtar’ as the largest manufacturer of uncoated freesheet paper in North America. It will be the second largest producer in the world.

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In a conference call held the morning of the announcement, Weyerhaeuser chairman, president and CEO Steven Rogel referred to the agreement as ‘the most value-creating option’ of the numerous possibilities it investigated prior to embarking on this venture.

“Domtar will enter its first day as the number one player,” Rogel said, “and this agreement allows each company to do what it could not have done alone. Domtar will be a force to be reckoned with on the market,” he added.

The $3.3 billion deal is additionally expected to create roughly $200 million in synergies related to transportation, logistics and other opportunities. It is these synergies, however, that are raising some questions concerning possible job cuts and a loss of Canadian corporate control.

Professor at McGill’s Desautels’ Faculty of Management Karl Moore assuaged fears that the proposed synergies would culminate in significant job losses. “It is possible that there will be job losses because of these synergies, but at the same time, it’s possible that they will provide the companies with more revenue, which means there will be more work, which means more jobs, meaning we likely won’t have to lay off as many people as anticipated, but yes, it’s possible that there will be some initial layoffs,” he said.

Concerns have also been raised regarding the location of the ‘New Domtar’ head office.
While the company’s head office will be located in Montreal, operations headquarters will be stationed in South Carolina. “This will provide us with solid exposure in the U.S., bring us closer to our customers, and away from the fluctuations of the Canadian dollar,” Domtar CEO Raymond Royer said. Although questions on what the U.S. presence implies in terms of a loss of control for Canada have been raised, as Moore noted, in a globalized market, if a company intends to sell its product in other countries, it cannot have all of its assets located in a single country.

As Moore highlighted, mergers and acquisitions are often problematic by nature. “Research tells us the majority of mergers fail, only a minority are successful. This is largely due to two reasons; either the companies are not able to deliver on the cost savings they promised, or there is a cultural clash between the companies. And so mergers are never without risk.”

In terms of a possible trend towards consolidation within the pulp and paper industry, Moore said competitors will be watching the results of this merger with a keen eye. “Other competitors will be looking at why Domtar and Weyerhaeuser decided to do this, and how it’s going. If there are too many plants in the industry, competitors will be evaluating whether or not the industry can support consolidation.”


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