Analysis on RRD's Three-Way Split, Future M&A Appetite

Perhaps the biggest piece of news in the printing industry so far this year was the recent announcement by RR Donnelley of its intention to split itself into three independent, publicly traded businesses. Let's review this unusual transaction and try to understand the strategic thinking behind it.

The first of the three firms that RR Donnelley has created will be known as the Financial Services Communications Co. (FinancialCo). It will be a $1 billion financial communications service provider doing things like content management, financial printing, and data management and analytics.

The second, the Publishing and Retail-Centric Print Services Co. (PRSCo), is going to be a $3.5 billion enterprise that manufactures periodicals, catalogs, inserts, books and directories for the publishing and retailing segments.

The third and largest creation is the Customized Multichannel Communications Management Co. (CMCo). This $7 billion dollar entity will offer commercial printing, labels, packaging, logistics, fulfillment, statements and creative design.

Splitting a company into three is not a typical transaction—in fact, it's the opposite of what happens in M&As. When one company buys another, there are normally administrative synergies right off the bat. In this instance, though, RR Donnelley ends up with three public company CEOs and three public company CFOs. There will be three separate audits, and there may even be multiple marketing departments.

So, there's an immediate challenge in terms of cost structure when going from one company to three. But splits of this kind do happen, and when they do, either of two reasons drives the decision.

The first is the wish to expose a "golden nugget." This means that there is a gem hidden in the larger corporation and that when this gem is exposed to the public, the multiples of the overall company will create shareholder value. But, I don't think that's the case here.

The second reason, and the one I believe to be the motivating factor for RR Donnelley, is that separating into three companies lets each one focus on what is important for its customers with products and strategies specifically for that business. FinancialCo, PRSCo and CMCo have different sets of customers, products and services. To that extent, this strategy makes good sense.

The challenge for creating shareholder value will be in the execution by the three companies. Over the next several years, it will be interesting to see what happens. The split may have the potential to make the companies a little more nimble—quicker to react to changing dynamics in their markets. We frequently see smaller businesses, many of them family owned, become quite successful because they are nimble in taking advantage of new capabilities and new technologies. The split should help the three new companies do the same.

A fair question to ask is how the split will affect RR Donnelley's appetite for future acquisitions. We anticipate that it will continue to acquire other firms within each of the three businesses. Instead of having one company buying other companies, we now have three. In fact, in one of the public documents, there's a reference to the retailing business' intention to purchase additional companies. So, we think there's little doubt that RR Donnelley is going to remain a very acquisitive company.