RR Donnelley: Where Print Still Fits

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"They are the most disciplined, financially savvy acquirers I've come across," says Troy. "They don't do deals that don't make sense." Quinlan says the compliment is deserved. "Our eyes have never gotten bigger than our stomachs," he says.

Management looks for three things in potential acquisitions, Quinlan says: What product or service can the new company bring to Donnelley's customer base? How much can the add-on company's costs be reduced? And how much printing capacity does it bring? "We treat the presses like airline seats," Quinlan says. "We need those presses to be running." In an industry where margins are low and returns are linked to utilization, analysts put Donnelley near the top—its gross margin has averaged 26.8% over the last five years.

Still, the purchases haven't always worked out. The company swung from a record profit of $405.3 million in 2006 to a loss last year, mainly due to $839 million in pretax writedowns from its purchases of Moore Wallace, document-processor Astron Group in 2005 for $954.5 million, and Office Tiger Holdings, a back-office outsourcing firm in Chennai, India, in 2006, for $248.8 million. "There was a vision that these would really take off," Quinlan says. "We haven't been able to meet those expectations." The company also shoulders $6.85 billion in debt, including $1.3 billion due in 2008. In interest alone, Donnelley owes $211.9 million this year.

Without a lift from takeovers, revenue and earnings growth are slowing. Add in the slowdown in the U.S. economy and the quickening pace at which print media are dying, and it's no wonder investors have turned sour on the company. Shares today fetch about $31, down from $45 last July and back to 2004 levels.

But most analysts contend the stock is undervalued and rate it a buy. In fact, with a net debt-to-capital ratio of 47%, Donnelley may be underleveraged, which means it could make more acquisitions, such as pieces of Quebecor, should they become available. "They could buy any printing company they want," contends Charles Strauzer, of CJS Securities in White Plains, N.Y. So is Donnelley in a buying mood today? "We are always acquisitive," responds Quinlan, circumspectly.

J. Duncan Moore Jr. is a contributor to BW Chicago.