Getting hitched: Weyerhaeuser and Willamette enter the awkward stage of a new relationship
Seattle Times business reporter
To win Willamette Industries, Weyerhaeuser had to schmooze Wall Street, oust three Willamette directors, mollify its own anxious shareholders, extend its buyout offer 12 times — and pay $825 million more than its original bid.
Now comes the hard part.
Weyerhaeuser must knit together an international network of about 300 sawmills, pulp and paper plants, cardboard-box factories and building-supply facilities. The combined company will own or manage 40.1 million acres of timberland in North America, Australia, New Zealand and Uruguay, and employ — at least at the start — more than 62,000 workers.
Managing those people, especially the nearly 15,000 Willamette employees who've proudly worn their "Just Say No Wey" buttons for the past year, may prove to be Weyerhaeuser's biggest challenge.
"The people around here are crying and hurting," Willamette employee Shelley Cottrell said the day after her company acceded to Weyerhaeuser's buyout. "They don't know what's next."
Federal Way-based Weyerhaeuser has plenty of experience with big mergers — its absorptions of MacMillan Bloedel and Trus Joist are praised by many in the industry — but this is its first hostile takeover.
And it doesn't have to look far to see how a botched merger can cripple a corporation.
"Nearly 80 percent of mergers and acquisitions fail, and about half the time the failure is due to a cultural misfit — cultural conflict, personal conflict," said Allan Steinmetz of Inward Strategic Consulting, a Boston-based firm that helps companies work through post-merger issues.
Hostile takeovers have an even worse track record, attorney Dennis Block said, because unlike friendly mergers, the acquirer has little or no opportunity to analyze its target and develop an orderly integration plan. Block heads the mergers-and-acquisitions department at Cadwalader, Wickersham & Taft in New York.
If anyone should know how to fit the two companies together, it's Steve Rogel. Before becoming Weyerhaeuser's chief executive officer in 1997, Rogel spent 25 years at Willamette, the last two as CEO.
That will help, Block said, but Rogel has been away from Willamette for more than four years. And the task will be even harder because of Willamette's bitterness toward Weyerhaeuser.
"There's so much infection here, so much bad feeling, so many bad things that were said about Weyerhaeuser on a daily basis," Block said. "It's going to be a tough, tough row to hoe."
Thinning the stand
Weyerhaeuser has said there are $300 million in savings to be gotten out of the merger over the next three years. To keep Wall Street happy, it will have to start finding them fast.
Willamette's headquarters in downtown Portland is almost certain to go, observers say. After that, Weyerhaeuser will start picking through individual plants and product lines.
Paul Ehinger, a consultant in Eugene with 55 years in the wood-products industry, said Willamette's particleboard business may be a candidate for disposal. Weyerhaeuser sold off its particleboard plants over the past few years, but Willamette has eight particleboard and medium-density-fiberboard (MDF) plants in the U.S. and three in Europe.
Those operations account for 14 percent of U.S. particleboard production and 22 percent of MDF. Ehinger said they could be attractive to a company like SierraPine or Roseburg Forest Products.
But Weyerhaeuser spokesman Bruce Amundson said selling the plants isn't likely. Weyerhaeuser's old particleboard business wasn't big enough to be an industry player, he said, but that's not the case with Willamette's operations.
"Willamette really has a leadership position in particleboard, so we're looking to continue running those," Amundson said.
Willamette's I-joist business, which makes engineered-wood support beams at plants in Woodburn, Ore., and Simsboro, La., may not fit with Weyerhaeuser's Trus Joist subsidiary, Ehinger said. And while Weyerhaeuser has moved all of its softwood plywood production to the Southeast, Willamette still has two plywood plants in Oregon.
Where the two product lines overlap, analysts say, Weyerhaeuser likely will keep the top-performing plants and downsize or close the least-efficient ones. That means Weyerhaeuser jobs could be at stake, because Willamette's plants are generally among the lowest-cost in the industry.
"Anyone who thinks it's only Willamette jobs that are in jeopardy, think again," said Steve Chercover, an analyst at D.A. Davidson in Lake Oswego, Ore.
Pruning the plant network would further another Weyerhaeuser goal: bolstering prices in the face of generally flat demand by reducing the supply of forest products on the market.
"They're going to find the best mills and run them flat-out, and the higher-cost mills will be run on a more intermittent basis," said Stephen Atkinson of BMO Nesbitt Burns in Montreal. By contrast, Atkinson said, Willamette "has taken their free cash flow and used it to build new facilities, which has destabilized the market."
Weyerhaeuser can also save money by rationalizing the two systems' supply chains — for example, feeding wood from a given forest to the closest pulp mill, be it a Weyerhaeuser or Willamette facility, and shipping the pulp to the closest paper plant.
More broadly, Weyerhaeuser wants to inject Willamette's entrepreneurial spirit — what that company calls "the Willamette Way" — into its top-down culture.
"In terms of adeptness and agility, Weyerhaeuser has been the Queen Mary, and Willamette has been a destroyer," Ehinger said.
"Willamette delegates authority and responsibility down to the operational managers and expects them to perform; Weyerhaeuser has always been considered top-heavy."
Take containerboard, the industry term for corrugated cardboard. Both companies make a lot of it, but according to Mark Wilde, wood-products analyst for Deutsche Banc Alex. Brown, they go about selling it very differently.
Willamette, he said, targets small and midsize accounts near its plants, where it has more pricing power. Weyerhaeuser, by contrast, tends to sign big contracts with big customers, such as Anheuser-Busch and Tyson Foods.
Ideally, Wilde said, the new Weyerhaeuser would be able to go after both kinds of customers: "What you want to get is that deal-closing culture, where the people running these box plants can go to a little vegetable-packing operation and not have to run every decision up to Tacoma."
Those cultural differences must be bridged for the merger to succeed.
"It's going to be very easy to spook all those Willamette people, who are already uneasy about what they're getting into," Wilde said. "They're going to have to convince them that they're not going to impose 'the Weyerhaeuser Way' on them."
Inward Strategic Consulting's Steinmetz said Weyerhaeuser will have to communicate two messages simultaneously: that Willamette employees are valued in the combined enterprise, and that anyone who doesn't cooperate will be shown the door.
Executives from Rogel on down should meet with Willamette workers to explain why Weyerhaeuser fought so hard for them and how they fit into the new corporate vision, he said. That's what companies skilled in mergers and acquisitions do, he said.
"They try to make them feel, not that they've been acquired, but that they've been transferred into a new family," Steinmetz said. "It's not 'You do it our way, or you're out of here.' "
At the same time, though, Weyerhaeuser will need to quickly identify those Willamette employees who are unalterably opposed to the takeover and in positions to sabotage it.
Chercover said he doubted many Willamette workers would jump ship, at least not right away. Timber-industry jobs, especially at the managerial level, often are some of the highest-paying positions in rural towns, where there aren't many alternatives.
"Steve Rogel knows a lot of the plant managers and others who are responsible for Willamette's success," Chercover said.
"If he can convince them that 'Things will be OK, stay the course,' they would be foolish to sabotage the operations and jeopardize their standing in the community."
Even so, Block said, Weyerhaeuser will have to move as quickly as possible after the merger becomes final, which could happen by the end of this month. The longer people are left to fret, he said, the longer it will take for the combined company to start moving forward.
"They have to walk a real tight line," he said. "They have to tell investors how they're going to achieve their corporate vision and reduce costs and make their numbers, while at the same time reassuring the employees they're not all going to get fired."
And, Steinmetz added, Weyerhaeuser can't underestimate the time, energy or expense needed to strike that balance.
"It's not something you can do for three weeks and never do it again," he said. "It's something that has to be reinforced for weeks, months, even years."
Drew DeSilver can be reached at 206-464-3145 or firstname.lastname@example.org.