Joel Quadracci said he expected the U.S. Department of Justice to take a close look at his company’s proposed acquisition of Chicago-based LSC Communications. After all, the combination of the two largest players in any industry is going to draw regulatory scrutiny.
“We really didn’t expect how they would look at it in the way that they did because it is a very narrow view of a very dynamic industry,” said Quadracci, chairman, president and chief executive officer of Sussex-based Quad/Graphics Inc. “They really looked at it in a very tight window of print products but also very tightly defined in those print products.”
Quad and LSC announced Tuesday that they had agreed to terminate the proposed $1.4 billion acquisition. The DOJ sued the companies in June to block the deal and a federal judge sided with the government in setting a mid-November trial date for the case. Quad and LSC had sought a trial at the beginning of October, ahead of an Oct. 30 deadline to complete the transaction included in their merger agreement.
“The DOJ would tell you our date of October is arbitrary and we don’t need to decide by then, but from a practical standpoint, from a risk standpoint actually we do, it’s way too long to wait when you’re competing against digital,” Quadracci said.
Quad estimated the deal could generate $135 million in synergies, but Quadracci said the more time passed the more the underlying economics would change, making it difficult to realize the original value of the transaction.
He added that the government’s approach to the competitive landscape Quad and LSC face was among the surprises of the review process.
“Believe it or not, the DOJ really indicated to us that they didn’t see that we were really competing with digital, which was the really challenging part to understand,” Quadracci said.
While Quad is known primarily as a printer, the company has taken a number of steps in recent years to expand its offerings across the marketing industry. Quadracci said the company is in the business of advertising and helping display advertising on paper while tech giants like Google and Facebook help deploy advertising on screens.
“We’re all fighting for the same dollars, it’s just that print’s been on the losing end of it for a while,” he said.
Quad’s annual securities filing is full of disclosures about the threat digital substitution for print poses to the company and its results show the impact disruption has had on the business. Fueled by acquisitions, last year was the first year Quad’s annual revenue increased since 2013. The first quarter of 2019 was the first time since 2014 the company posted an organic sales increase.
“Again, they think they’re safe in assuming we’re just thinking about print as it was 20 years ago, but it isn’t 20 years ago, it’s today, it’s 2019 and we just happen to believe that there’s several billion people out there who agree that print competes with digital, but I can’t determine how a judge or DOJ would look at it,” Quadracci said.
Even without considering digital competition, Quadracci said the DOJ looked too narrowly at competition within segments of the printing industry.
“Here in Sussex we’ve got publication presses that are printing books today, we’ve got magazine presses that are printing directories, we’ve got retail presses printing catalogs,” he said. “The reality is you really can take the different print markets and even though some people may not compete with us today in print or call it maybe a catalog because they print books, it’s really not a stretch for them to start being able to compete on it, it happens.”
The DOJ court filings pointed to intense pricing battles between Quad and LSC in recent years that appeared to show millions of dollars in benefit for customers, but Quadracci said many of the comments on those deals were used out of context.
“That’s why a day in court would have been good because we could cross examine and pull that all apart,” he said. “Yes, it is a competitive marketplace, but the reality is most of our competition is coming from outside the industry.”
Moving forward, Quadracci said the company would continue to focus on its Quad 3.0 strategy, an effort that has expanded the business beyond print services to data analytics and marketing. He said Quad’s recent acquisitions – including Periscope, Rise Interactive and Ivie & Associates – helped set the foundation for the strategy and the company is ramping up its capabilities.
“What will happen now is as we continue to get demand we have to grow capacity, but in the services space that’s really talent,” Quadracci said.
