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Investors turn the screws on struggling forest firms

By John Clarke
Copyright 1998. Contact publisher for permission to use. 

Sometimes bloodied, often unbowed, Robert Findlay survived seven years as president and chief executive officer of MacMillan Bloedel Ltd, Canada's largest forest products company. He faced off with militant environmentalists who threw things at him at annual meetings. he was frequently at odds with the trade unions. He watched the industry bled dry by usurious stumpage costs and declining harvests. And he wrung his hands as the Americans forced softwood export restrictions on Canada despite free trade. But in the end he was done in by the toughest taskmaster of them all - the shareholder. 

When he went into retirement in mid-September, he turned over a seriously under-performing corporation that never quite knew where it was going. Analysts pointedly welcomed this much-needed change, even though they knew nothing about the man replacing Findlay, Thomas Stephens, from the Manville Corp. of Denver. In their terms Findlay's tenure had to be accounted a failure. 

But MB is not alone in this wilderness. The entire Canadian industry is coming under stiffening shareholder pressure to perform. 

The pace of corporate restructuring picked up remarkably in 1997. By the time Findlay left MB, about $20 billion had been spent or bid on mergers, acquisitions and other realignments in both wood and pulp. Among the largest there was the $4 billion Abitibi- Stone consolidated merger, Avenor's $2.75- billion bid for troubled Repap (stopped by shareholders wary of Repap's large debt), Alliance's $800 million purchase of Kimberley Clark's Coosa Pines newsprint operations, and Kruger's takeover of Scott Canada for $451 million. 

The wheeling and dealing has been going on right across Canada as the industry seeks more financial stability in the eddies of political and economic change. 

No longer is management able to act as an island unto itself, manipulating or outmanoeuvering shareholders as if they were marionettes. There's a new breed out there who are being forced by pension and social program cutbacks to rely on the stock market to provide for their future. 

Good trees are harder to find. On better land annual allowable cuts are maxed out and poorer trees that are available don't produce the quality the markets want. Stumpage costs in Quebec and Ontario may at the moment be lower than in BC, but their timber allocations are already fully committed so they can't push production much higher. They're going to find it difficult to satisfy their restless shareholders looking for better returns. 

Quebec and Ontario won't be far behind BC in toughening their practices codes, even if they do so differently. They'll have to conform to international standards that will inevitably raise their costs. And sooner or later, provincial governments, short of cash themselves, will want to raise the cost of the wood they allow the companies to cut. 

As one analyst has put it, "gone are the days when you could get away with mining the forests." 

Money managers are saying it's not enough to complain about forest practices, land-use restrictions and environmentalist shenanigans. These things aren't going to go away. The industry has to adapt and it's not doing it well enough. 

The switch to new management styles is hard for executives used to having it more their own way. How can anybody predict market trends when so many new influences are at work? How can managers give investors the assurances they want to keep their money in the industry? 

In 1995 the industry was forecasting a big pulp turnaround. It never came and shareholders lost confidence in corporate policy choices. This is why they're trying to shake out the people who made those choices. 

What they seem to want specifically is more concentration on the things that companies do best. They don't want their investment decisions compromised by the fact that a company otherwise attractive because of good solid wood performance is being dragged down by poor pulp performance. And vice-versa when wood profits are slumbering. 

Large, integrated companies like MB are not the holy grail for investors anymore. That's why MB has been getting out of tranportation and some of its pulp operations. It's why Fletcher Challenge has been getting out of wood altogether. 

It's all part of a fundamental narrowing of focus, if not to a single lens, then to a less panoramic perspective. MB and other integrateds will remain large. But they'll concentrate on their best lines, aided by much more aggressive research for new products like parallam beams and other oriented strand construction materials. Markets for new products will be more predictable - if Canada really is in for a new golden age of growth, as Bank of Canada governor Gordon Thiessen says it is. 

Stronger, more informed and intelligent shareholder pressures will be positive, but only if they're complemented by government policy. Governments, of course, still have the greatest influence. They have the power to make or break with silly or draconian legislation that may reduce the options for industry to adapt to the brave new world. 

But they are also captives of the politics of the day, which is why shareholders, companies and governments will have to work together to save the forest industry from the excesses of those who don't care as much as they should for its future. Shareholders will be able to do little to remake the industry if the politicians don't give them enough slack to do so. 

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