Good morning and thanks for inviting me. I haven’t been here before, but I did read your membership roster and this is a very impressive group.
I don’t know how familiar you are with Weyerhaeuser Company, although I bet you know something about Quadrant Corporation, one of our businesses, thanks to Steve Dennis’s membership. Let me give you a brief overview.
With our acquisition of Willamette Industries, almost exactly a year ago, Weyerhaeuser has become one of the world’s largest forest products companies. Our products include:
- Lumber and panels to make houses and for remodeling
- Pulp to make various paper products, as well as hygienic products such as diapers
- Corrugated packaging—or what some people call cardboard boxes—used to ship many of the products we use
- Houses and even planned communities.
- And more.
In most of our major product lines, we are the largest producer in the world or one of the top three.
In 2002, our revenues were $18.5 billion, likely placing us in or near the Fortune 100. Our earnings were $241 million, not nearly what we’d like, but 2002 was an extremely difficult year for Weyerhaeuser Company, as I suspect it was for some of your businesses.
I mentioned our Willamette acquisition earlier and Steve told me that’s what you’d like to hear about today … the inside story.
Well, I don’t know how “inside” the story will be, given that much of it played out in the newspapers or on television for almost a year and a half. But it is quite a story … one of the largest so-called “hostile” takeovers in American business history … engineered by the former CEO of the acquired company … between two Pacific Northwest icons whose histories were nearly identical.
Today, I plan to cover:
- The reasons behind the acquisition
- How it occurred
- Putting the two companies together, and
- Our future as a combined company.
As the executive responsible for our timberlands, I also want to tell you a little bit about what we’re doing to protect and sustain our forests. If you’re not an outdoor recreationist, you might think this has little to do with you, but bear in mind that a significant amount of King County was once owned by Weyerhaeuser Company. Some of you might find our company owns the mineral rights to the land your house is built on.
You may know us better, however, for our real-estate activities, both commercial and residential. Two major Eastside communities—Snoqualmie Ridge and Redmond Ridge—were developed by Quadrant, our local real-estate operation.
In fact, Redmond Ridge recently made the front page of the Seattle Times when people lined up for days for a chance to buy 27 homes designated as “affordable housing.”
I have to admit I’m amazed that homes priced between $235,000 and $262,000 are now considered low-end housing … and that households earning up to $93,000 a year qualify. This illustrates how increasingly out of reach housing is becoming for many families in the greater Seattle area.
Housing is not my topic, however. That’s for Steve to worry about. Now it’s time for me to begin the story of why and how Weyerhaeuser acquired Willamette.
To start with, Steve Rogel—our Chairman of the Board, President and CEO—came to Weyerhaeuser on December first of 1997 from Willamette. He’d spent 25 years there, rising through the ranks to become CEO for his last two years. In fact, Steve was the hand-picked successor and protégé of Willamette’s Chairman of the Board, and, until that day, no one had ever left the office of CEO at Willamette except for retirement.
So it was no small act of courage for Steve to give up that position to join what one Business Week article termed “the much hated and far larger rival” up the road. Doing so was akin to treason—and the reception Steve got when he informed his boss was not friendly.
So why did Steve do it? To repeat Steve’s own words from a talk he gave at the University of Washington:
“I can’t deny there was a little bit of ego involved. After all, Weyerhaeuser was three times as large as Willamette with a much greater presence within the industry. It was also flattering to be recruited by Jack Creighton, my predecessor at Weyerhaeuser, and someone I greatly respected. Taking the Weyerhaeuser job also was a chance to return to my home state—and be closer to my alma mater (the University of Washington).
“But the predominant motivation was simply that I had accomplished all I could at Willamette. I jumped at the opportunity for a new and larger challenge.”
That explains Steve Rogel’s motives in leaving Willamette for Weyerhaeuser. But why turn around and buy the company he’d left?
The truth is that prior to Steve’s leaving Willamette, both companies had talked about acquiring the other. Yes, that’s right, Willamette’s board had discussed buying Weyerhaeuser. If you think that’s a stretch, remember the times. This was during the heady mid-1990s, when smaller companies routinely bought larger ones. Think AOL and Time-Warner or, closer to home, Qwest and US West.
What was the attraction? For one thing, the companies were extremely complementary. Some analysts referred to Willamette as a “mini-me” version of Weyerhaeuser. However, although in many of the same businesses, each company offered strengths in areas where the other was weaker.
For example, the combination put Willamette’s manufacturing excellence together with Weyerhaeuser’s strong relationships with large, growing customers. It gave Willamette the opportunity to benefit from Weyerhaeuser’s industry-leading expertise in growing trees, and it provided Weyerhaeuser access to Willamette’s superior ability in mill engineering.
Besides what Weyerhaeuser leaders described as a “hand-in-glove” fit between the two companies was the imperative of growing larger. The combination of Weyerhaeuser with Willamette made us number one, two or three in the world in our timberlands, wood products, containerboard and fine paper businesses.
Why is it that important to grow? Our highly fragmented industry is going through rapid consolidation.
To a large extent, this consolidation is being driven by our customer base. Our customers—such as Home Depot, Lowe’s, Office Depot, Staples, Office Depot, OfficeMax—are getting bigger and bigger, and they want to do business with only one or two, or a handful of, suppliers in any major product category. They also want consistent quality and just-in-time delivery over large geographic areas.
Another reason for wanting to grow is that, with the rise of huge mutual and pension funds, companies with small market caps became relatively illiquid—that is, major buys and sells by these large funds could significantly affect share prices. Big investors don’t like that, so they tend to avoid small-market-cap stocks, depressing their value. With Willamette, we’re now viewed more attractively.
At the time we made our unsolicited offer—on November 13, 2000—some on Wall Street called the proposed combination “the dream deal.” Willamette, of course, called it something else.
To get a flavor for Willamette’s feelings, consider these actions. Willamette executives taped a picture of Steve Rogel to a voodoo doll and jabbed pins into his face. Other employees started a chat room abuzz with unfavorable comments about Steve and Weyerhaeuser Company.
Many of Willamette’s nearly 15,000 employees began wearing buttons that read “Just Say No Wey,” “way” being spelled W-E-Y. In response, some of our employees donned buttons that proclaimed, “Where there’s a WLL, there’s a WEY,” “will” being spelled “W-L-L,” Willamette’s stock-exchange symbol.
The protests even made their way to Bellevue, where Willamette maintained a box plant on 120th near Lowes. Anti-merger slogans were pasted on the back of their trucks for all to see as they made their way to I-405. Now that plant is part of our system.
Weyerhaeuser’s initial bid for Willamette was $48 a share in cash, plus assumption of $1.7 billion in debt, for a total offer price of about $7 billion.
Although Willamette accused Weyerhaeuser of trying to buy their company “on the cheap,” our offer represented a 38 percent premium to Willamette’s share price on the day of the offer and a 60 percent premium to the 60-day average.
A lot of Willamette shareholders jumped at the tender offer we made, but a large block, represented by some members of the founding families, Willamette executives and other employees did not. Willamette people were fiercely independent and wanted to stay that way.
Although Weyerhaeuser continually captured proxies for more than 50 percent of Willamette’s shares, certain “poison-pill” provisions prevented us from buying Willamette until its board of directors agreed. And they weren’t about to.
So we began the process of nominating candidates to Willamette’s board of directors who would be open to our offer.
In the summer of 2001, Steve Rogel attended Willamette’s annual meeting—a singular act of courage, in my opinion—and, to stony silence, outlined why he thought the combination made sense.
With the share proxies Weyerhaeuser controlled, we were able to get three directors elected to Willamette’s board. With 10 members on their board, that meant we might still have to go through the process one more time, delaying the acquisition another year. I can’t imagine what some of those board meetings were like.
Periodically, we raised our offer to try and move the Willamette board our way.
Arbitrageurs, who’d bought large blocks of shares of Willamette in anticipation of a deal, also began applying pressure to Willamette’s board to accept our offer, even threatening lawsuits.
In a last-gasp move, Willamette made a bid of its own to acquire the Building Materials Business of Georgia-Pacific, a business larger in number of employees than Willamette itself.
Most analysts didn’t see much value in the deal and, when Goldman-Sachs, Willamette’s banker, refused to finance the purchase, Willamette threw in the towel. That was on January 21st of last year and after Weyerhaeuser had upped its offer to $55.50 a share, making the cost of the transaction $7.9 billion, or about $900 million more than our first offer.
Obviously, $7.9 billion is more than pocket change. So you might wonder: How are we going to pay the debt? And, was it worth it?
From the start, we figured we could get at least $300 million a year in synergies from the combination. Synergy is a word that’s bandied about a good deal, but we think of a synergy as a savings or revenue-enhancement resulting from efficiencies gained in combining efforts.
The various kinds of synergies we envisioned from acquiring Willamette included an improved product mix, streamlining of administrative services, rationalization of sales and distribution, and increased manufacturing efficiency.
Once we got a peek under the tent, so to speak, and could, for the first time clearly perceive Willamette’s assets and modus operandi, we discovered more potential synergies than we’d anticipated. Let me briefly describe two examples:
- About a year ago, we were fortunate enough to get all of the packaging business of Tyson Foods, a very large provider of chicken and other meats to supermarkets. In fact, Tyson’s box business represents about 2 percent of all U.S. corrugated packaging. When Weyerhaeuser won this account, we confronted the need to spend $25-30 million to upgrade eight of our facilities to service it.
With the addition of Willamette’s box plants to our system, we are able to lower freight costs, improve asset utilization, and reduce the amount of capital required by $10-12 million.
- Here’s a synergy from our wood products business. Even before the acquisition, Weyerhaeuser was the biggest player in the softwood lumber game, supplying top-quality framing lumber to independent lumber yards and mega-retailers alike.
Willamette also had a sizable piece of this market, but they mostly used independent brokers and wholesalers to move their building material. By flowing a portion of Willamette’s lumber directly to our large customers, former Willamette sawmills have been able to attain a significant increase in the price of their wood, while enhancing that availability of wood products to Weyerhaeuser customers.
So how are we doing on capturing the $300 million in synergies we promised Wall Street? At the end of last year, we estimate that we’ve achieved an annualized run rate of $184 million a year, and we’re confident we’ll achieve the entire $300 million by the end of the first quarter of 2005 … right on schedule.
As to paying off the debt, is it a load? Yes, it’s a load, nearly $13 billion—and it’s pushed our debt-to-equity ratio beyond our normal comfort level. However, the Willamette acquisition, in cash-flow terms, is already positive even though we’re still paying some of the costs of the acquisition. In December, we offered $600 million in bonds to refinance some of our short-term debt into longer-term debt. They were snapped up in one day—and the bond-rating agencies reaffirmed the company’s investment-grade bond rating.
That only leaves culture. From the start, there were those who argued that Weyerhaeuser’s and Willamette’s cultures wouldn’t fit together. Weyerhaeuser, for example, was viewed as methodical, even cautious, in its approach to business, but with an excellent reputation for weighing the interests of all stakeholders in its decisions. Willamette was viewed as more opportunistic and nimble, but lacking some of the processes needed in a large company.
I was placed in charge of integrating these two companies, acting for several months as the chief operating officer and chair of an Interim Operating Committee that managed Willamette prior to our official combination. From that vantage point, I can attest that fears of a culture clash were overly hyped.
From the start, we assured our new colleagues from Willamette that we wanted to learn from them.
Indeed, we did not approach the integration as a chance to overlay our culture on theirs. Rather, we viewed the combination as an opportunity to build a new culture and a new company. In spite of our size and the obligations of a larger company, Weyerhaeuser wanted to become quicker and more agile.
At the same time, we recognized that Willamette itself had grown to such a size that it was beginning to need more companywide processes to capture economies of scale. Many leaders from Willamette were also aware of that.
To ensure that we didn’t lose those aspects of Willamette’s culture we wanted to maintain, we hired as many former Willamette leaders we could, installing two of them on our Senior Management Team. This not only provided a greater sense of security to former Willamette employees, it ensured that Willamette’s best practices were brought to the attention of top management.
Today, Weyerhaeuser in the midst of becoming something new, a hybrid in some ways, although we’re open to new ideas from outside both companies.
Although there is the occasional friction from the melding of two cultures into one, I believe everyone realizes that our competition is not within the company, but outside of it. We are all Weyerhaeuser employees.
It’s a time of change … a time of challenge … an exciting time.
In spite of the many hurdles that lie between us and our vision of being the best forest products company in the world and a global leader among all industries, the goal is in sight and it’s achievable.
Before I conclude—and, in my role as executive vice president for Timberlands—I want to say a few words about how Weyerhaeuser manages its forests. We may be in the city now, but we’re surrounded by trees, and our green surroundings are a heartfelt value for most of us.
The management of our region’s and our nation’s forests has been a matter of great controversy for more than a decade, going back at least to the spotted-owl battles of the late 1980s. The public’s interest in the fate of our forests and its residents is understandable. Trees are probably the only resource, with the possible exception of water, that people seem to believe belong to everyone. And people in general have many misperceptions about the nation’s forests.
Some think the nation is running out of trees. It isn’t. In terms of acreage, the U.S. has about the same area of forestland it did in 1920—in spite of a 143 percent increase in population since then. And the volume of wood in our forests is up 44 percent since 1963.
Some think that commercial forestry leads to species extinction. It doesn’t. To the best of our scientific knowledge, no species has ever become extinct in North America due to forestry.
And many people, viewing a recently harvested area, fail to understand that the forest products industry always replants—usually within one year, weather permitting. It’s in our economic interest to do so.
Weyerhaeuser owns or holds harvest rights on nearly 42 million acres of forests worldwide—or an area almost exactly equal to the state of Washington. And 1.4 million of those acres are in Washington state.
We manage all of these forests with commitments—among others—to:
- Practice sustainable forestry
- Protect water quality, wildlife habitat and biodiversity, and
- Manage the visual impact of harvesting
Our performance against these commitments is independently certified by third-party auditors.
Although some people might feel that we should never harvest a tree, the fact is that wood is one of the only truly renewable and recyclable natural resources.
That’s why we at Weyerhaeuser believe it only makes sense to devote some portion of our nation’s abundant forestland to commercial forestry and the wood and paper products it provides us all. Everything from toothpicks to telephone poles … from fence posts to furniture … from packaging to paper … from hardboard siding to entire homes.
So that’s it. The inside scoop on the Weyerhaeuser-Willamette deal.
Thank you for your kind attention.
Now what questions do you have?
