Financial Printing Outlook -- Clawing Their Way Back

By Caroline Miller

It has been a tough year for the financial printing industry. The economy was already shaky when the September 11, 2001, terrorist attacks hit the World Trade Towers—America's financial epicenter. Investment banking, securities law and financial services are in shambles. Even so, most hoped to see that much needed and much talked about recovery in 2002. But, instead, the year has been mired in corporate accounting scandals, a never-ending bear market, the threat of war and the virtual standstill for M&A deals and IPOs.

As a result, financial printers have had to reduce their work forces, streamline their operations and look outside for sources of revenue.

"There's no denying it—2002 has been a terrible year for the financial printing industry," admits Paul Masterton, president of R.R. Donnelley Financial, the second largest financial printer in North America with segment sales of $476 million.

"While we've always been vulnerable to economic cycles, this is as severe as we've ever seen it. And it's impacting more than the financial printing industry," he adds. "It is seriously impacting the clients we serve with significant layoffs throughout the investment banking, securities law and financial services communities."

In the capital markets, the industry's market size reportedly fell from $1.6 billion in 1999 to $1.1 billion in 2001. In that same time frame, IPO demand fell from 544 to 132. In 2002, the capital markets business has seen an even greater decline, with a total market size of just $900 million. Overall, deal flow in the market has decreased, with SEC filings down 11 percent from the previous year, including a 16 percent drop in M&A business and a 13 percent decrease in secondary deals.

"This 'annual decrease' masks a much lower level of demand in the second half of the year," Masterton remarks. "Instead of the expected recovery, the second half was even worse than the first half, with overall SEC filings down 42 percent from the third quarter of 2001."

Drop in Spending

The investor communications needs of diversified financial services companies have also felt the impact of the depressed economy and the falling stock market, he notes.

"Our customers are reducing their communications spending for both regulatory materials and marketing communications, while new funds and new products have all but dried up."

It's these difficult market conditions that are making 2002 a make or break year for financial printers, according to Robert Johnson, chairman and CEO of Bowne & Co., the largest financial printer in North America with segment sales of $717 million.

"The successful companies will be those able to manage their way through the current environment and take advantage of opportunities when conditions do improve. There are a number of current opportunities—if you have the resources and strategies to go after them," he says.

In the compliance arena, passage of the Sarbannes-Oxley Act and SEC rule changes are driving an increase in the volume and scope of required government filings, including those which must be filed electronically, according to Johnson. In the investment management industry, he says there are opportunities to provide companies with print-on-demand and related services to help them control costs and reduce inventories as they target certain customer groups and seek to raise assets under management. "So, the opportunities are there if you are positioned to grab them," Johnson reports.

Like Bowne, R.R. Donnelley Financial has made the most of the new SEC electronic filing requirements.

"The SEC's accelerated filing requirements have created new opportunities for us, and new options for our capital markets clients," reveals Masterton. "On the day the Sarbannes-Oxley Act went into effect, R.R. Donnelley Financial introduced an "anytime, anywhere" Web-based self-service tool called NET.filer, which allows users to create and file selected SEC forms electronically without our intervention. That's historic and unique in our industry," he states.

Masterton contends that NET.filer is also the only Web-based EDGAR service with automatic and direct transmission to the SEC, as well as an investor-friendly HTML format for corporate Websites. In this way, NET.filer supports the SEC's encouragement of electronic filing, as well as its goal for increased transparency in disclosure," he adds.

While the SEC's requirement has created new avenues for the financial printing community, market players like Bowne are looking for even more ways to diversify.

"We've been taking advantage of opportunities in other industries, as well as looking for cross-selling opportunities while reducing our reliance on cyclical business of the kind that's hurting the financial printing industry today," reveals Johnson. He points to Bowne's creation of a relatively new business unit, Bowne Enterprise Solutions, which uses their technology for pursuit of opportunities in the investment management industry, as well as other fields.

Help in Tough Times

"For example, we know that financial services companies are currently experiencing pain. They're going through tough times, and they need to find ways to reduce marketing costs and still attract new customers. With print-on-demand and other technologies, we can help them control their budgets, reduce materials inventories and eliminate waste. In the future, as they move toward customization and personalization of marketing materials to reach selected investors, we'll be ready to help them with that. We also think the trend toward customization and personalization will allow us to apply our technology to other industries, such as health care and pharmaceuticals," Johnson says.

Meanwhile, Donnelley Financial is leveraging its position within the R.R. Donnelley structure to ensure that it remains successful in difficult times.

"We are in a unique position," Masterton says. "We have the ability to leverage the unparalleled resources of the entire R.R Donnelley worldwide network of manufacturing centers—gaining the benefits of flexible scheduling for our customers, improving our service delivery, optimizing assets through the consolidation, aligning production with distribution, and achieving better productivity through process redesign, continuous improvement methodologies and investment in superior technology," Masterton notes.

"While financial printing will always face a certain amount of volatility in parallel with market and economic conditions, our transformation makes R.R. Donnelley Financial far less vulnerable to economic and market cycles, and far more able to consistently create shareholder value," he says.

Like Bowne, R.R. Donnelley Financial is also looking for ways to diversify its service offerings. Masterton reveals that his company is looking to move beyond the mutual fund industry to focus on other financial services segments, such as banking and insurance, which have tremendous communications needs and opportunities. Donnelley is also introducing a service offering around direct marketing campaigns, where it can solve marketing challenges that are unique to the financial services industry.

"Here, print is one part of an integrated delivery chain that could also include communications strategy, data analysis, targeting and testing, content development and management, delivery, tracking and measurement, as well as evaluation and refinement," Masterton explains.

On its customized communications solutions end, Donnelley is focusing on aligning its capabilities with clients' needs for efficiency. In doing this, they see clear growth opportunities. "Customers, just like us, are facing pricing pressures—the need to cut costs, improve efficiencies and raise service levels to their customers," he adds. "We are focusing on delivering communications solutions, identifying ways to eliminate redundancy, and improve the time necessary to get communications created and delivered. By combining process expertise with customized solutions and service delivery, we are making our clients' communications both more efficient and more effective," he says.

Although it has been a rough year for the financial printing sector, R.R. Donnelley Financial did have something to celebrate earlier this year—the return to Lower Manhattan. "Ten months after the collapse of the World Trade Center, clients returned to our 75 Park Place facility—adjacent to Ground Zero—which houses our client services center, the only financial printing plant in Manhattan and the headquarters for R.R. Donnelley Financial," states Masterton.

Looking Ahead

And while both Masterton and Johnson are not optimistic as they head into 2003, both feel that financial printers can no longer wait out the market. Instead, they must be aggressive and progressive when looking at their business models.

"This is a tough environment, but we cannot sit idly by and wait for improved markets to return," Masterton concludes. "Our clients have continuing and evolving needs, including how to become more efficient and more effective with their communications. As our customers and our markets change, so must we."