1 Introduction and industry backgroundThe current European market for Datum Paper Products

1 Introduction and industry background

The current European market for Datum Paper Products (DPP) in 2005 is not encouraging. The company designs and

manufactures textile fabrics for use in the paper industry. Its main customers are large European and American paper

making companies and while the UK market is fairly stable, over 80% of DPP’s products are sold abroad. Its

customers use highly expensive capital equipment, with a new paper mill costing ￡300 million or more. The paper

makers supply paper to global newspaper and book publishers who themselves are under pressure to consolidate as

a result of the growing competition from alternative information providers, such as TV and the Internet. The industry,

therefore, carries many of the signs of a mature industry, the paper manufacturers have considerable overcapacity and

are supplying customers who themselves are facing intense competition. Paper makers are looking to reduce the

number of suppliers and for these suppliers to meet all their needs. The net result is heavy pressure on suppliers such

as DPP to discount prices and improve international service levels, although there is little potential to increase sales

volumes to achieve further economies of scale. DPP’s response to this more competitive environment has been to

attempt to secure higher volumes through increasing their market share and to search for cost reductions in spite of

the need to improve customer service levels.

DPP is one of a number of operating companies in the paper and ancillary products division of Park Group Industries

plc, a diversified company with other divisions in industrial materials, automotive products and speciality chemicals.

The paper and ancillary products division itself is split into the North American Region and the European Region.

There are some 30 companies in the division with plants in 13 countries. Within the paper and ancillary products

division there is recognition that in order to survive let alone make a profit some industry restructuring is necessary.

Currently, DPP has some four UK plants manufacturing different parts of their product range. Any consolidation,

including acquisition, is best done on a regional basis and Europe seems a logical place to start.

Strategic options – acquisition or a greenfield site？

Ken Drummond is Managing Director of DPP, and has spent a lifetime in the paper industry but has had little

experience in acquiring other companies. The pressures faced by the European industry mean that there are, in reality,

two strategic options to achieve the necessary restructuring. Firstly, there are opportunities to buy existing companies

available in most European countries. The identification of suitable target companies, the carrying out of due diligence

procedures before negotiating a deal and integration of the acquired company typically takes a year to complete. The

second option is to move to one of the countries that have entered the European Union in 2004 where operating costs

are significantly lower. There are significant government and European Union incentives for firms that move to a new

or greenfield site in one of the many economically depressed areas. The greenfield option would take up to three years

to get a plant set up and operating.

The acquisition option

Ken is able to draw on the expertise of corporate headquarters that has had some experience with growth by both

organic expansion and by acquisition. The initial search for possible acquisition candidates has revealed a French

family owned and managed firm, ‘Papier Presse’, based in the southwest of France, some 800 kilometres from DPP’s

main plant in the UK. Papier Presse has three manufacturing plants in France, each heavily unionised and controlled

by the owner Philippe Truffaud. Papier Presse’s markets are exclusively with European paper makers and it has no

significant international business outside of the EU. The technology used is more dated than DPP’s and manning

levels are significantly higher. Papier Presse’s product range has some significant overlap with DPP’s but there are also

some distinctive products. Philippe’s son, Francois, is Sales and Marketing Director and his son-in-law, Henri, is

Operations Manager. Philippe himself is the third generation of Truffauds to run the firm. Ken recognises the

considerable differences between DPP and its potential French partner – language being only the most obvious one.

The sales, service and distribution systems of the two firms are totally distinct but their customers include the same

European paper makers. Reconciling the two information systems would be difficult, with customers looking for much

higher service levels. Historically, DPP, with its own research and development function, has a better record of product

improvement and innovation. However, Papier Presse is better regarded by its customers for its flexibility in meeting

their changing demands. In terms of strategic planning DPP contributes to the strategic plans drawn up at divisional

level, while the family dominance at Papier Presse means that planning is much more opportunistic and largely

focused on the year ahead. Each company has to operate within a climate of heightened environmental concern over

toxic by-products of the manufacturing process. There are other similarities in that both companies have felt that

product superiority is the route to success but whereas DPP’s is through product innovation; Papier Presse’s is through

customer service. Clearly integrating the two companies will present some interesting challenges and the family

ownership of Papier Presse means that a significant premium may have to be paid over the current book value of the

company.

The greenfield option

Ken, however, also recognises that the apparent benefits of moving onto a new greenfield site in one of the countries

recently admitted into the European Union will itself bring difficulties. One obvious difficulty is the lack of a modern

support infrastructure in terms of suppliers, distributors and logistical support. There is also a strong tradition of

government intervention in company growth and development. Although there are government agencies looking to

attract new companies to set up in these countries, there are considerable bureaucratic and time consuming

procedures to overcome. Above all there is continuing government financial support for small inefficient, formerly

state-owned, companies making the products for the national paper makers, who themselves are small and inefficientcompared to the customers being supplied by DPP and Papier Presse.

Required:

(a) Using the data provided and models where appropriate, assess the strategic fit between Datum Paper

Products and Papier Presse, indicating areas where positive or negative synergies are likely to exist.

(20 marks)