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R.R. Donnelley & Sons Company Message Board

  • jamesrpc jamesrpc Jul 31, 2001 5:28 PM Flag

    DNY as a Cash Cow

    Very interesting discussion here - much higher quality than one generally sees on Yahoo! message boards. I'd like to throw my 2c into the ring, as both an MBA and the son of a long-time RRD employee.
    Clearly, DNY has two choices - the buggy whip analogy is apt.
    *First, it can try to change and adapt toward the future. Unfortunately, it hasn't had a lot of success in this respect (think Red Rover, among other failed efforts).
    *Second, it could continue to cut costs, and gradually spiral downward over the next 20 years or so, making money all the while, until it eventually expires along with the ink on paper printing industry.

    Quite frankly, I think that option 2 is the better choice. I don't think that, given the company's track record, it really can make the jump necessary to survive in a non-print media age.
    Think of it this way. Option 2 means, for example, providing shareholders with ~$400MM a year in free cash flow over the next twenty years. At a 10% discount rate, that gives the company a value in the neighborhood of $4BN.
    If, on the other hand, they go with option 1, there are two possible outcomes: success or failure. If there's success, then that $400MM per year might grow at 5% or so per year, long term. That would mean the company is worth about $8BN. On the other hand, if the effort fails, it could easily eat up 90% of that $400MM per year in cash flow, so the company might only be worth $400MM (or even less if the lack of focus on profits hurts the core business). I think that the odds of success for a growth strategy, given DNY's track record, are less than 1/3. Using a 1/3 success, 2/3 fail weighting, we get a value for option one of $2.9BN.

    Comparing the two, I say option 2, the gradual downward spiral, is the right course for shareholders. This is, I believe, the route that Davis has (if not openly, then at least covertly) chosen.

    I'm interested in your thoughts.

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    • I too am an ex-rrd'er, lucky to leave under my own power in '94 after a great 12 year run. I stumbled across this board last night, and spent 2 hours reading your posts.

      This is a tremendous board.
      Congratulations to all that contribute here.
      I hope there are 1,000 readers for every contributor.

      I was blown away reading the frustration expressed by current and former employees alike. While I know leaving "the Indian" was absolutely the right decision, there are still times I think about that 'old girlfriend'. Donnelley gets under your skin.

      dnynomore - it's not your company anymore. Take your talent and passion out into the marketplace. Regardless of the economy, companies always need smart and passionate people. And next time...if you aren't recognized sooner than later...don't wait so long.

      Good luck to all.

    • Going back many years ago, I remember sitting in a business class discusing the business cycle of most companies. There was a startup, followed by growth, a leveling off and finally a slow decline. In the declining stage companies in railroading, utilities etc did not grow very much and most of their profits were paid out in dividends.

      Is this what you are suggesting about DNY?

      If so, welcome to the club. I have felt that leadership has been lacking for a very long time. There has been little or no vision and until DNY gets someone who can turn the Company around the future looks unrewarding to shareholders.

      A long time ago, I suggested that our board should contact Jack Welch of GE when he retires
      and ask if he would be interested in helping to turn DNY around.

      He could do it in his spare time.

    • If you are correct that option 2 is correct, then let me propose to you that there is no need to have 90% of the upper level mgmt that presently exists and that the expense saved can go directly to the shareholders. I agree that option 1 is not possible under the present regime, however either scenario would suggest that present mgmt needs to be replaced/eliminated. If option 2 is the desired outcome, then why not buy back debt instead of outstanding shares?


      • 1 Reply to woody912
      • I would definitely look at trimming upper management. If this company were taken private, as has been discussed, then the ax would fall throughout the organization; anything that wasn't generating cash or necessary to generate cash would go. This would include basically all the public service/charity operations. DNY's history as a "good corporate citizen to its communities" would be just that - history.
        As for buying back shares vs debt, there are a lot of good reasons to have debt. First off, interest payments are deductible for tax purposes. In fact, the ideal capital structure for a company, if there were no risk of default, would be $1 in equity, and all the rest of the capital needs funded by debt. Clearly, the risks and costs of default (restructuring, lawyers, etc.) mean that that structure isn't desirable. Still, there's no real indication that DNY is carrying too much debt - quite the contrary; given the strong cash flows the company generates, an increase in debt and faster share buyback might not be a bad idea.

    • *****SELL AT 32*****

      I agree with James that the downward spiral is better for this company than getting into new adventures. However, the spiral probably won't be as steep as he thinks (print and electronic media complement each other rather than being mutually exclusive [TV's heyday spawned TV Quide]), and RRD probably will come out of this on top of Queb and Quad, both of which have worse trouble ahead then does RRD.

      Queb/World is a loosly strung together hodge podge of un-allaigned plants, and is 10 years behind RRD in addressing this issue. Quad does have some new equipment, but is giving away printing to keep it rolling, while their middle and old age stuff is largely idle. If RRD does not shoot itself in the foot (again) they can clearly win a war of attrician, gaining work at the expense of the other 2.
      PS.... hey Magman, give us some of that stuff you are smoking will ya? You've been wrongly predicting 40s for a long time now! No way with THIS company in a weakening economy. Mid 30s at best for next 3 years.

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