Merrill Corporation Business Information, Profile, and History

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History of Merrill Corporation

Merrill Corporation delivers diverse document management and communications services to the worldwide financial, legal, and corporate communities. Based in St. Paul, Minnesota, Merrill is the third largest financial printer in the world, behind industry mainstay Bowne & Co. and printing powerhouse R.R. Donnelley & Sons. While financial printing remains a core market and top revenue producer for the company, Merrill has steadily reduced its reliance on that volatile market. In 1996, financial printing provided slightly more than 36 percent of the company's revenues, corporate printing nearly 30 percent, commercial clients 21 percent, and document management services nearly 13 percent.

Merrill's services include typesetting, printing, reproduction, electronic filing, custom communications design, and publishing. The company prints prospectuses and other timely, transaction-based, and compliance documents for the worldwide financial community. Mutual funds and other investment vehicles are another important source of company revenue. The company's Merrill/May subsidiary is a leading provider of customized marketing, corporate identity, and franchise products. Document management services include document reproduction, litigation support, imaging, scanning, storage and retrieval, electronic SEC filing, and other document reproduction services. Merrill has been at the technological forefront of the printing industry, using high-speed telephone-based data transmission to serve its clients through an innovative "hub and spoke" system, with typesetting and other services centralized at its St. Paul headquarters and sales and service centers operating in 42 offices in 31 cities in the United States. The company also operates five regional printing facilities, which handle approximately half of the company's printing needs. The remainder is contracted out to a network of printer "partners." Most of Merrill's revenues are domestic. However, the company has achieved a significant international presence through joint ventures in Canada, Europe, Asia, and South America. John W. Castro, principal architect of Merrill's growth, continues to lead the company as president and CEO.

Getting Started: 1968

Merrill and his wife, Lorraine, started their typesetting business in their home in St. Paul in 1968. Called K.F. Merrill, the company soon began serving the financial printing needs of the Twin Cities market. For most of the next decade, Merrill acted as the company's sole salesman, while also assisting in all phases of the business, from proofreading to delivering the final product. By the end of the 1970s, the company had grown to regional status and dominance of the St. Paul-Minneapolis market--without owning a single printing press. Toward the end of the decade, the company had about $1 million in sales and some 30 employees. Yet years of working 18-hour days had begun to take its toll on Merrill, by then in his 60s. After three heart attacks, he began looking for someone to take over the day-to-day operations of the company.

Merrill chose Chicago native John W. Castro, who joined the company in 1978 as production manager. Castro, only 29 years old at the time, already had printing experience stretching back to the mid-1960s. After graduating from high school, Castro had taken a construction job in order to earn money for college. Laid off from that job after six months, Castro took a friend's advice and applied for a pressman's job in a local manufacturer's print shop. There he developed a keen interest in graphic arts and printing, and particularly the newly developing application of electronics technology to the still traditional printing industry. While working full time at the print shop, Castro managed to complete three years of college at Chicago's DePaul University. An offer of a job with a Chicago printing company, however, convinced Castro to leave college without a degree. The printing company placed Castro at the forefront of the still nascent computerized typesetting applications. As Castro's expertise grew, he began consulting for other printing companies looking to use the new technology, and in this role he met Kenneth Merrill.

Merrill offered Castro the job as Merrill's production manager. However, as Castro told Minnesota Ventures, Merrill "was really looking for a partner. And the thing I always thank him for is that he gave me a lot of immediate authority in the business, from day one." With Merrill's encouragement, Castro worked to transform the company, which was struggling to break even in spite of sales of more than $1 million.

Although dominant in its market, the company was faced with a new challenge. By the late 1970s, the financial printing industry's larger firms were beginning to expand nationally. Competitors such as industry leader Bowne & Co. were establishing printing operations in the Twin Cities area, responding to a similar expansion by their mainstay law firm and underwriter clients. Merrill, which relied on a single client for some 30 percent of its sales, soon faced a choice: to expand the company nationally or sell it to a competitor.

Named president of the company in 1981, Castro and a team of top executives weighed their options. They decided to build Merrill into a national printing operation, with an eye toward breaking into the New York market, the heart of the financial printing business. "[We] started to figure out where to grow this business," Castro told Minnesota Ventures. "We didn't have cash so we had to figure out a way to grow it that was different and less expensive than our competitors did it." What Castro came up with was a "hub-and-spoke" system based on that being deployed by the airline industry. Rather than imitate its competitors, which typically moved into a new market by establishing complete printing operations, Castro turned to his background in computerized typesetting and the developing technology in telephone data transmission.

Castro's approach would tackle two significant problems. Establishing printing operations in other regions required a great deal of capital. Printing, however, tended to be a volatile business, with demand for services following a peak and valley activity cycle. Building its own printing facilities would require Merrill not only to raise more cash than it had, but also to be able to absorb the costs of operating during low demand periods, while being able to supply clients during times of high demand. Castro determined that the company would avoid owning its own printing presses, a policy the company followed through much of the 1980s. Instead, Merrill's typesetting and related operations were centralized at its St. Paul headquarters.

Expansion was driven by setting up far less capital-intensive sales and service centers in target markets. Customer orders were taken by a sales office, beginning in Chicago, and the project would be sent to the St. Paul headquarters using a dedicated analog phone line capable of transmissions of about 48 characters per minute. The finished product would be transmitted back to Chicago, where it was brought to a printer "partner," one of several local printing firms contracted to complete Merrill's orders. Successful expansion of the company, however, depended on overcoming still another obstacle. The financial printing industry remained somewhat of an "old boys club," with relationships between printers and clients stretching back decades or more. Bowne & Co., for example, had been in operation since 1775. Castro overcame this obstacle by aggressively recruiting the top salespeople in each market, paying top salaries, and relying on their ties with clients to bring Merrill business. In this way, Merrill essentially bought into the "buddy" system of the financial printing market.

Rising to the Top in the 1980s

Castro established Merrill as a lean, price-competitive organization, plowing earnings into enhancing its technology--particularly its data transmission capacity--instead of building printing presses. In contrast, its competitors were saddled with heavily unionized, capital intensive printing operations. Yet, as Castro pointed out to Inc. magazine, "The term 'financial printing' is kind of a misnomer. Three-quarters of the work performed is typesetting, not printing. How can others possibly keep up with us?" Printing often represented the largest cost associated with an initial public offering or merger agreement. Unburdened by the need for large cash outlays, Merrill was able to provide its services at lower cost. The company quickly moved to enter the crucial New York market, which accounted for nearly 40 percent of the industry's $630 million in yearly sales. "They used to laugh at us," Castro, who was named CEO in 1984, told Minneapolis-St. Paul CityBusiness. "Here's a company in Minnesota trying to compete with Wall Street and the deal doers."

Merrill caught the wave of the bull market of the 1980s, capturing clients among that period's flood of mergers, acquisitions, hostile takeovers, and initial public offerings. Sales grew quickly, reaching $8.3 million in 1983, and climbing to $25 million by 1985, as the company established sales offices in seven major markets. Much of its success lay in its use of technology, while its competitors struggled to convert their typesetting operations, hampered by union contracts requiring retraining of their employees. Merrill's employee base, which grew to 400 by the mid-1980s, remained non-union, while the company's employee-friendly policies kept them loyal to Merrill. By 1986, Merrill was printing a new prospectus--its own, as it went public, offering 1.7 million shares. The company was also moving to hedge its operations against a downturn in the financial market, expanding its commercial printing operations. Early in 1987, the company added advertising typography capacity to its Chicago office and acquired Financial Publishers, a company that produced newsletters for banks. Sales continued to rise, to $38.5 million and net income of $1.6 million in 1986, and to just under $50 million, with earnings of nearly $3 million, the following year. In less than a decade, Merrill had become the industry's sixth largest financial printer.

1987: Profiting from "Black Monday"

The so-called "Black Monday" stock market crash of October 1987 claimed the financial printing industry as one of its victims. Almost overnight, financial printing sales, which had grown to an estimated $800 million per year, shriveled to around $600 million. Merrill's stock slid from $14 to $4.25 per share, prompting the company to buy back a large chunk of its shares the following year. But Merrill, which still had about $9 million in cash from its IPO, was in better shape than its industry rivals. Within three years, three of its chief competitors--Sorg, Charles P. Young, and Pandick, Inc. (ranked fifth, fourth, and second, respectively)--would declare bankruptcy and go out of business entirely.

Merrill, too, was hit hard by the collapse of the financial printing market. But it had successfully expanded its corporate printing services, including products such as 10-Ks, 10-Qs, and annual reports, to account for about 60 percent of revenues by the end of the decade. The company's revenues grew, to $55 million in 1988 and to $63 million in 1989, returning profits of $4.5 million and $3.8 million, respectively. Then Merrill was forced to take a temporary earnings hit after writing off stock it had purchased in rival Sorg when that company declared bankruptcy. Nonetheless, the company continued to expand, opening new sales offices, including one in Atlanta, and purchasing for around $3 million the Chicago, Los Angeles, and San Francisco offices of then struggling Charles P. Young. That purchase also included printing presses in Chicago and Los Angeles, marking Merrill's first company-owned presses. The cost of the acquisition, coupled with the writeoff of the Sorg stock, however, produced the company's first loss in ten years, of nearly $1.25 million on revenues of $69 million.

Growth During the Early 1990s

In the aftermath of the stock market crash, the printing industry quickly began to consolidate. When Pandick declared bankruptcy in 1990, Merrill negotiated an agreement to take over Pandick's Dallas printing facilities, allowing Merrill to expand its capacity at virtually no cost. The collapse of its competitors, as Castro told Corporate Report Minnesota, was "the easiest way to go from No. 6 in the market to No. 3." By then, however, Castro had skillfully led the company into diversifying its services, expanding its commercial printing capacity while adding new services such as reproduction and custom design. In this way, Merrill was well positioned for the next blow to the barely recovering financial printing industry. The recession of 1990 and the outbreak of the Gulf War combined to put a near halt to the transactions upon which financial printers depended.

Merrill acquired two small printing companies, Southeastern Financial Printing Corp. of Atlanta and Group Web, Inc., of St. Paul, in February 1990. The Group Web acquisition also included printing and binding equipment. By then, Merrill was handling approximately 25 percent of its own printing needs. Merrill was also moving into a new direction, legal publishing, through its Merrill/Magnus Publishing Corp. subsidiary, hoping to build on its knowledge of the legal community. Meanwhile, the company continued to expand its business by making acquisitions. In July 1990, Merrill acquired Sorg's former Illinois operation, S Printing Co., adding still more printing equipment to the company's in-house capacity. In that same month, the company also purchased Group Printing California, based in Los Angeles. These acquisitions, and Merrill's expanding share of the financial and corporate printing markets, which was reaching 14 percent, helped propel the company's sales past the $100 million mark for its 1991 fiscal year.

Another factor in Merrill's favor was the printing industry's practice of awarding contracts on a bid basis, generally from among three competing bids. With three of its principal competitors out of business, Merrill found itself receiving a greater number of invitations to bid on contracts. Moreover, the end of the recession meant also that there were many more contracts on which to bid. Financial printing once again began to supply a primary source of Merrill's revenues, soon accounting for more than a third of annual sales, up from a low of 21 percent of revenues at the beginning of the decade.

The company steadily gained ground in the first half of the 1990s. Its growth was further aided by a joint venture agreement made in 1992 with London-based Burrups Ltd., the leading European financial printer. Another acquisition, of May Printing Company for $25 million in 1993, also boosted revenues and strengthened the company's commercial printing business, by then the fastest-growing segment of company sales. Merrill's sales neared $150 million in 1993, bringing a net profit of nearly $9 million; by 1994, sales rose to $182 million, for a net income of over $13 million. The following year, with sales growing to $237 million, Merrill was again preparing new acquisitions, and in 1996 the company paid $33 million for the purchase of assets of Corporate Printing Co. of New York, and an additional $7.4 million in cash and notes for FMC Resource Management Corp., based in Seattle. These purchases helped raise Merrill's revenues to nearly $250 million for its 1996 fiscal year.

Continued Expansion in the Late 1990s and Beyond

Merrill in 1999 accepted a merger offer of over $500 million from Viking Merger Sub, Inc., an affiliate of DLJ Merchant Banking Partners II, a subsidiary of Donaldson, Lufkin, & Jenrette Inc. Merrill's shareholders approved this transaction in November, which left Merrill Corporation as the surviving entity. It also resulted in Merrill becoming a private company.

In 2000, Merrill launched www.merrilldirect.com as a business-to-business web site designed to allow companies and law firms to prepare financial documents online. In a press release, Merrill President and CEO John Castro said, "We are proud to be the first in the financial printing industry to become a complete online management resource for financial documents required by publicly traded companies."

Meanwhile, Merrill was expanding its document management services (DMS), designed mainly for law firms. In late January 2000, it announced an alliance with INTEGREX, an Owens Corning subsidiary with expertise in technology-based litigation support services. The next month, Merrill announced the start of its web-based UR-Law system that used Oracle technology to provide speedy access to text, video, audio, and emails stored online.

Such technological innovation helped Merrill gain new DMS clients. In January 2001, it announced a five-year contract with the law firm of Akin, Gump, Strauss, Hauer & Feld. That contract brought the number of Merrill's new DMS client sites for the year up to 23. In June 2001, the law firm of Morrison & Foerster LLP signed a similar five-year contract. The law firm's 11 offices in the United States soon gained the new Merrill technology and Merrill employees to run the systems. A Morrison & Foerster office administrator in Los Angeles praised Merrill for its "understanding of the culture of law firms" and its flexibility to meet the needs of its clients.

In an April 12, 2001 press release, Merrill Corporation announced that its Financial Document Services business had become the "first major filing agent to convert its EDGAR filings to the new Securities and Exchange Commission (SEC) web-based filing system which used the Extensible Forms Description Language (XFDL) format. The month before, when many public companies filed their annual SEC reports, Merrill submitted almost one-fourth of all HTML documents submitted to the SEC, far more than any of its competitors. Again the company reaped the rewards of its technology investments.

In early January 2002, Merrill Corporation announced a strategic alliance with CCBN, a Boston-based provider of Internet services to support communications between about 3,000 public companies and the investment community. As part of this arrangement, CCBN acquired some of Merrill's Investor Relations Edge product line.

For the fiscal year ending January 31, 2000, Merrill Corporation reported revenue of $587.7 million, up 15.3 percent over fiscal 1999. The company's revenue came from five sources: Financial Document Services ($259.2 million), Investment Company Services ($137.9 million), Managed Communications Programs ($98.2 million), Document Management Services ($77.3 million), and Merrill Print Group ($15.1 million). Merrill also reported a net loss of $17.6 million in fiscal 2000, compared to a net income of $26.5 million in fiscal 1999.

Merrill's 2001 sales were $649.5 million, a 10.5 percent increase over the previous year. It also reported a net income of $17.9 million. The company was ranked as number 473 in the 2001 Forbes Private 500.

Principal Subsidiaries: Merrill/May; Merrill Burrups Worldwide (50%); Quebecor Merrill Canada Inc. (49%).

Principal Competitors: Automatic Data Processing, Inc.; Bowne & Company, Inc.; R.R. Donnelley & Sons Company; Workflow Management.

Chronology

• Key Dates:
• 1968: K.F. Merrill Company is founded in St. Paul.
• 1982: Branch offices are opened in Denver and Chicago.
• 1983: A Los Angeles office is opened.
• 1984: John Castro becomes president and CEO; company name is changed to Merrill Corporation.
• 1985: Company acquires Adwest Corporation and opens offices in New York and Washington, D.C.
• 1986: Merrill acquires Appellate Printing, and completes its IPO.
• 1992: Company merges with Burrups Ltd. of London.
• 1996: Paul Miller replaces Kenneth F. Merrill as board chairman.
• 1997: Company acquires Superstar Computing and Total Management Document Service Center Business and has a two-for-one stock split.
• 1999: Merrill recapitalizes with DLJ, becomes a private company, reorganizes into five business sectors.
• 2000: Firm expands internationally with offices in London, Paris, and Frankfurt.
• 2001: Company forms Merrill/CPY as a strategic alliance with Chas. P. Young Company and begins a marketing and development agreement with TRION Technologies.