Case study: AbitibiBowater

The story
AbitibiBowater is the world’s biggest producer of newsprint, formed after the 2007 merger of Abitibi and Bowater.

Abitibi was founded in 1912 by Frank Harris Anson. He and his successors built the company through a series of mergers and acquisitions.

The question was whether this model of driving growth through M&A could continue to be the most successful.

The challenge
The company has come under increased pressure from international competitors, especially low-cost newsprint exporters from Asia and Latin America.

In the past, when faced with declining profitability and market position, Abitibi’s model was to acquire the next biggest competitor to avoid industry irrelevance.

In 1979, faced with an ageing physical plant and high construction costs, Abitibi acquired the Price company, which had modern mills.

In 1997, Abitibi faced the same problem of obsolete mills, but now newsprint prices were falling by an average of 1.1 per cent a year. Abitibi again purchased a rival, Stone Consolidated, in the hope that rationalising production would return the combined entity to profitability.

The exercise was repeated in 2000 when Abitibi bought Donohue, a highly efficient and profitable newsprint producer.

New competition
In each case, Abitibi regained its leadership position. Unfortunately, Abitibi’s fight is now a global one – cornering the North American market, the goal of the previous mergers, was no longer enough to ensure profitability.

In spite of this, the company was reluctant to expand and build similarly dominant positions in the emerging markets in pulp and paper production. Instead, in 2007, it once again looked to a domestic merger, this time with Bowater. The union created the world’s biggest producer of newsprint, controlling approximately 50 per cent of North American production.

Analysts predicted that the concentration of so much newsprint production in the hands of one large player would help AbitibiBowater tip the balance of bargaining power back to producers from publishers, raise prices for the industry, and restore its profitability.


What happened: Continuing high production costs and debt levels, global recession and financial crisis have fundamentally changed the marketplace. These combined pressures forced AbitibiBowater to file for bankruptcy in 2009. It has only just emerged from creditor protection.

The lessons
In spite of cutting newsprint and commercial paper capacity by a third and dramatically reducing annual fixed costs, a formidable challenge remains.

Attempts to tighten newsprint supply will be countered by new production elsewhere (notably in China), and continued sagging in North American demand for newsprint as traditional print products move online.

The problem is that, as market conditions have changed, AbitibiBowater has not adapted its business model for growth.

Corporate strategy literature is rife with cautions against expansion by M&A only. That recent acquisitions by Abitibi have failed to produce sustainable shareholder value should come as little surprise.

Recent news from AbitibiBowater indicates that it is gradually shifting its strategy from producing newsprint to focusing on higher grades of paper, expanding export markets and reducing exposure to any one product.

As it emerged from creditor protection, the company noted that these strategies are driven by a desire to absorb – and quickly adapt to – changes in the marketplace, suggesting that management learnt from its recent mistakes and that growth by acquisition is no longer its default strategy.
- Financial Times, 2 Feb 2011