Page 5: Integrated development
The closer integration of the elements of a company offers many opportunities for achieving economies and efficiencies. Two types of integration are vertical and horizontal.
- Vertical Integration is a combination of businesses that operate at different stages of manufacture of the same product.
- Horizontal Integration is a combination of businesses that operate at the same stage of manufacture of the same product.
The Jefferson Smurfit Group is committed to the concept of vertical integration. For this reason, the Group is deeply involved in the entire range of activities which this entails, from owning and/or managing forests, to the reclamation and recycling of waste paper, to the manufacture of paper, right through to the manufacture of containerboard, boxboard, paper sacks and corrugated cases. Most significant, perhaps, is the Group’s recycling activities - as previously mentioned, the Jefferson Smurfit Group is the world’s largest recycler of waste paper.
Waste paper is a vital source for the fibre used in making containerboard and boxboard. This reclaimed fibre is known as secondary fibre, to distinguish it from the primary fibre which is provided by wood. Both types of fibre are needed, but on average, 70-80% of the fibre used in the production of paper packaging is this secondary, recycled fibre.
Horizontal integration has also been a feature of the Smurfit strategy for growth, where the Smurfit Group has acquired firms which operate in its own area of competence, and which offer opportunities for market expansion. This is a feature of the Smurfit Group’s strategy of acquisition-led growth.
From its very beginning, the Jefferson Smurfit Group has grown primarily through the acquisition of other companies. The theory behind this strategy can be simply expressed - building value, not machines. The paper and packaging industry is cyclical in nature. This is because the demand for packaging is directly related to how the rest of the economy is doing.
Economies do not experience a steady rise in growth. The reality is that economic growth experiences a series of fits and starts, leading to a trade-off between pleasure and pain. When demand for goods is high, the demand for packaging is high also. When the demand for goods falls, the demand for packaging falls as well. Historically, during periods of high demand, the paper and packaging industry has tended to over-invest in plant and production capacity, with the result that, today, growth in production capacity has exceeded growth in demand.
By prudently acquiring additional production capacity in times when demand is down, the Jefferson Smurfit Group has been able to add value to its business without building new plants and machinery which are likely to lose value later in a subsequent downturn of the economy as a whole.
Some of the Smurfit Group’s more significant acquisitions are shown in the table.
The Smurfit acquisition strategy has always been focused on adding value to the Group and this has been achieved by adherence to the following principles:
- Identification of undervalued assets - Acquiring well-invested, quality assets at attractive prices, often from groups for whom paper and packaging is not a core business.
- Critical timing Acquiring production capacity at times when industry cycles offer advantageous circumstances.
- Rationalisation for maximum performance - Realising the full value of new acquisitions by using industry expertise to extract maximum performance.
- Strategic minority stakes - Taking minority stakes where full ownership would mean unacceptable risk or over-exposure of the balance sheet.