Federal Paper Board Company, Inc.
Federal Paper Board Company, Inc.
75 Chestnut Ridge Road
Montvale, New Jersey 07645
Fax: (201) 573-4426
Sales: 1.46 billion
Stock Exchanges: New York
SICs: 2611 Pulp Mills; 2631 Paperboard Mills; 2657 Folding Paperboard Boxes
Federal Paper Board Company, Inc., is a leading producer of recycled and bleached paperboard, which is used to make packaging, brochure covers, sports cards, and paper cups. It also produces market pulp, uncoated free sheet paper, lumber, folding cartons, and paper and plastic cups. The market for its products is primarily domestic, although its presence abroad has been expanding, and it has facilities in the United Kingdom. Federal Paper Board celebrated its 75th birthday in 1991 and has a history of strong leadership and daring acquisitions. During its 75 years, it had only three presidents: founder William Shortess, J. R. Kennedy, and John R. Kennedy, Jr.
William Shortess founded Federal Paper Board Company in 1916. During his tenure as president, from 1916 to 1941, he acquired mills throughout the Northeast. According to Richard Blodgett’s book Federal Paper Board at Seventy-Five, written for the company’s 75th anniversary, “The joke about Will Shortess was that he couldn’t drive by a paperboard mill without buying it.”
Shortess’s first mill, which he called Federal Paper Board Company, was just across the tracks from his former employer’s Bogota, New Jersey, mill, which Shortess had quit in 1916 over a dispute with the owner. Only a few months later, he bought his second mill, in Versailles, Connecticut. By the end of the 1920s, he had purchased eight mills, and when he died in 1942, he owned nearly a dozen. Shortess’s practice was to buy them and modernize their equipment in order to boost production and streamline their operations, and he sold only one mill during his years as president. All of the mills Shortess acquired produced recycled paperboard.
Shortess was something of a gambler in business. The company grew quickly but was often on shaky ground. His purchases usually added debt to the company, which was often on the verge of bankruptcy because of such large debts. His decade of purchases left the company in trouble in 1929, as Shortess and Federal fell behind on loan payments. Creditors took control, but allowed Shortess to continue to manage the company. He rallied to the situation—he cut costs, stopped buying mills, and attended to basic operations. Despite the Great Depression, he was able to pay the creditors and regain control of his company. The creditors, however, advised him to hire a financial executive, J.R. Kennedy.
In 1935, Shortess acquired an 80 percent interest in S-C-S Box Company in Palmer, Massachusetts, when that company was unable to pay $100,000 that it owed for paperboard purchases. S-C-S specialized in production of egg cartons, clothing boxes, and bakery boxes, and when business was down, it made jigsaw puzzles to sell at local five-and-dimes for ten cents each. Purchase of this company gave Shortess a built-in customer for paperboard from his other factories. In the 1940s and 1950s, S-C-S Box was a leading producer of paperboard boxes for tomatoes. By the late 1970s, this company was the last of Shortess’s acquisitions to be operated by Federal, and in 1990, it too was sold.
Shortess died in 1942. Federal Paperboard at Seventy-five sums up the Shortess era as “a time of risk-taking, growth, consolidation and narrow escapes from financial disaster.” Joanna Shortess, Shortess’s widow, inherited the business and was determined to become president and manage the company, even though she had taken no interest in company matters while Shortess was alive. Three Federal employees offered to buy the company: Federal’s financial officer, J.R. Kennedy, and Federal mill managers Guy Freas and Howard Brown. While Joanna Shortess was reluctant to sell to them, she did offer to give them each ten percent ownership and the remaining 70 percent when she died—as long as she became president and a full and active partner, participating in management of the company.
However, the three men turned her down and continued with their plans to try to buy the company. Almost a year after her husband’s death, Joanna Shortess sold the company to Kennedy, Freas, and Brown for $1.5 million with no money down. She had agreed to a non-interest-bearing, 90-day promissory note secured by shares of the company, and within those 90 days they arranged alternate, long-term financing from the Metropolitan Life Insurance Company. The sale actually included four companies, Federal Paper Board with five mills, Acme Paper Board with four mills, Liberty Paper Board with one mill, and S-C-S Box Company.
Kennedy became the company president, Brown was chairperson, and Freas served as executive vice president. Under Kennedy’s management, Federal’s sales went from $7 million in 1942 to almost $250 million in the early 1970s. The early years, however, were a struggle. During World War II, raw materials became scarce, and mills had to scramble to get the wastepaper they needed to produce paperboard. For Federal the challenge was simply to survive until the war ended.
However, the years following the war were boom years for American businesses, including Federal Paper Board Company. Demand for paperboard soared—only to drop off again from its record high sales in 1947 when the economy settled down again. Choosing to be optimistic about the future and believing that the economic boom would continue, the three partners agreed to a major capital spending program to modernize its existing plants and acquire new plants.
Federal had continued to produce folding cartons at its S-C-S plant and decided after the war to go into this business more seriously. As paperboard boxes in which hundreds of products are packaged—including cereal, crackers, and macaroni—folding cartons are so named because they are shipped flat to the consumer products company. For 15 years, if a folding box company was close enough to one of Federal’s paperboard mills, Federal bought the company. By 1957, carton sales accounted for 72 percent of Federal’s sales. Federal replaced aging facilities with new ones.
In 1952, Federal offered shares of stock to some of its employees and in 1953 went public. In 1955, it was listed on the New York Stock Exchange. By going public, Federal raised money to finance several acquisitions. In 1953, it bought National Folding Box Company, surprising other members of the industry who knew National to be a top company while Federal was new to the business. Federal also bought seven other carton companies over the next ten years. By the end of the decade, products marketed in Federal’s folding cartons included Colgate toothpaste, G.E. light bulbs, Bayer aspirin, Camel cigarettes, Coca-Cola, Pepsi-Cola, and Fab laundry detergent. Federal had quickly become the second largest folding carton manufacturer in the country.
However, Federal was also beginning to face a new problem—most of its paperboard mills were more than 50 years old and rapidly becoming inadequate to fill Federal’s needs. Federal acquired several paperboard companies, and in 1961, it built the largest paperboard mill in the world in Sprague, Connecticut. Production at the Sprague Mill experienced several glitches before the mill was up and running efficiently. However, its design allowed for periodic updates and by the early 1990s it had doubled its capacity and was still considered a “state-of-the-art” mill. In fact, in 1991, the Sprague mill was still the “newest” paperboard mill in the country, and as such, was at the center of the recycling business and the only mill in the United States to use a recycled paperboard making method called the Inverform process.
One of the ventures that had given Kennedy the time and money to survive Sprague’s early years, even when it was losing money because of early production problems, was the acquisition of Federal Glass Company in Columbus, Ohio, in 1958. This acquisition was Federal Paper Board’s only diversification outside of its core business of paperboard and related products. (Although both were named Federal, there was no relationship between the two companies before the 1958 purchase.) Federal Paper Board had been interested in diversifying into the corrugated box industry, and Federal Glass owned Hercules Box, a small corrugated box company. Kennedy saw Hercules as an opportunity to get a corrugated box division up and running. While Hercules and the division failed to grow as large as Kennedy had hoped, Federal Glass proved to be an important investment.
Federal Glass produced quality glass tableware and was the industry leader in machine-blown glass. It sold its products to decorator companies to embellish and resell to department stores. Federal also began to sell glassware to restaurants and hotels, started making direct sales to department stores and other retail outlets, and also entered the “promotion” market, manufacturing the inexpensive glasses given as premiums by gas stations, grocery stores, and other retailers. Federal Glass’s sales increased from $11 million in 1958 to $39 million in 1972. It made money while Federal Paper Board was updating or replacing old facilities and trying to bring the Sprague plant up to an efficient operational level.
However, the 1973 OPEC oil embargo lowered demand for the glass company’s wares and increased its costs. With gasoline shortages, oil companies no longer sought to attract customers with premiums. At the same time, production costs skyrocketed because the glassmaking process required so much energy. In 1973, sales and profits fell sharply. When the company became profitable again in 1976, Kennedy tried to sell it to another glassmaking company. However, the Federal Trade Commission blocked the sale, charging antitrust violations. After trying in vain for two years to either find another buyer or convince the FTC to reverse its ruling, Federal Paper Board reluctantly closed Federal Glass.
Federal Glass, however, had also provided the financial leverage Federal Paper Board had needed to buy a Riegelwood, North Carolina, mill a few years earlier. Riegelwood was a huge paperboard mill for which Federal Paper Board paid $115.6 million in 1972. At the time, Federal had annual sales of about $160 million, and Riegelwood sales were nearly $80 million, so purchase of the operation represented immense growth. Federal wanted this mill so that it could get into the bleached board business, a goal of the company’s for 20 years. At that time, demand for the all-white bleached paperboard was increasing, while the market for recycled paperboard, with its grey color, was slipping.
The purchase of the Riegelwood operation may have been the key to Federal’s success, decades later, for by the 1990s, Federal’s business was predominantly bleached paperboard. Federal was fortunate enough to buy the facility at the lowest point of a recession in the paperboard industry, and following the purchase, paperboard prices began to climb again. Purchase of Riegelwood also included Federal’s first timberlands and a market pulp operation for producing processed wood fiber to market to other paper companies. During the next decade, Federal Paper put nearly $300 million into Riegelwood to increase its paperboard-making capacity and update machinery.
The purchase of Riegelwood had been the first major acquisition by the new president John R. (Jack) Kennedy, J.R. Kennedy’s son. But it was not the first major deal that he pulled off. Early in his presidency, he faced a serious threat to Federal Paper Board when Simkins Industries, Inc., a paperboard company in New Haven, Connecticut, announced plans to take over Federal. Although Simkins was a $28-million-a-year company, and Federal had sales of $108 million, the threat was real.
Simkins’ president, Leon J. Simkins, informed Kennedy that he was going to make a cash tender offer of $35 per share for up to 43 percent of Federal’s stock. At the time, its price on the New York Stock Exchange was about $27 per share. Jack then phoned his father and his brother, Quentin—Federal’s vice-president—the company’s lawyers, and other key people, and they went into action. Their strategy was to buy as much stock as they could and to ask friends to purchase it as well in order to keep it out of Simkins’ hands. Among Federal’s “friends” who agreed to purchase stocks were Lever Brothers, Hess Oil, Colgate-Palmolive Company, and Topps Chewing Gum. Employees bought shares, even if they could afford to buy only one or two. This activity drove the price per share above Simkins’ offered $35, and shareholders found it more profitable to sell through the stock exchange. These defensive tactics have since become illegal, but they were legal and effective for Federal in 1967. To further ensure that it would remain autonomous, Federal made Simkins’ offer less and less attractive to shareholders by raising dividends and splitting the stock three-for-two so that shareholders would keep their stock instead of selling it. Federal also sued Simkins, claiming purchase by Simkins would constitute an antitrust violation by creating a paperboard monopoly in the Northeast. Simkins countered by charging Federal with manipulating its own stock prices with its defensive tactics. Eventually Simkins gave up its bid to take over Federal, and both suits were dropped. In subsequent years, Federal fought off several other takeover bids as well.
Following the purchase of Riegelwood, Jack Kennedy looked for another bleached paperboard operation in the South. In 1982, he made an offer on Continental Group, Inc.’s mill in Augusta, Georgia, as well as its 150,000 acres of nearby timberland. Continental, a can company, had diversified into paper-board in the late 1950s. Although the paperboard division was marginally profitable, Continental turned down Federal’s bid of $300 million. A few years later, the entire Continental Group was taken over and some of its assets, including the Augusta mill, were put up for sale to finance the purchase. Kennedy then bought the operation and surrounding land for $317 million in 1985. This purchase doubled the size of Federal’s bleached paperboard business, and the company jumped from fifth place to second place in the domestic bleached paperboard business. Within a few years, Federal launched a five-year expansion and modernization project which was completed in 1992.
In 1989, Federal purchased Thomas Tait & Sons Ltd., a mill in Scotland that produced uncoated freesheet, the white paper for copiers and printers. With this purchase Federal began competing head-to-head with Scandinavia for the freesheet market in the United Kingdom. It also gave Federal a presence in the European Community and a guaranteed customer for market pulp from its Riegelwood facility.
Federal became a major competitor in the paper cup industry by acquiring two paper cup plants, one in 1989, the second a year later. With the merger of these two operations, Federal almost instantly held 14 percent of the paper cup market. Kennedy anticipated this would be a growth industry because of the environmental move away from styrofoam and back to paper-board disposables. However, during the early 1990s, this remained a highly competitive market, and demand was down because of a poor economy.
Although decades earlier, the core of Federal’s business had been the folding carton business, in 1991, the company made the decision to pull back from that market because it was no longer a growth industry. It sold four of its carton plants in 1992, retaining four carton plants that provided packaging for specific products, including cigarettes.
Federal was also in a good position to benefit from the movement towards recycling of all types of paper. Its Sprague, Connecticut, plant was central to Federal profits because of its high capacity to process recycled paper products into paperboard for packaging. Towns desperate to dispose of newsprint and other wastepaper without having to pay exorbitant “tipping” fees to the dumps, were giving away material that had cost Sprague $100 per ton.
Federal’s five lumber plants produced almost 582 million board feet of lumber in 1992. It owned 566,000 acres of timberland, and it leased another 127,000 acres. That year, it cut 15,400 acres and replanted 18,000 acres with more than 12 million seedlings.
Although the economy was in a recession in the first half of the 1990s, Federal was optimistic about its future. Most of its facilities had modern, efficient equipment to allow the company to benefit from an economic recovery, and its recycled paper operations were likely to grow as more and more companies shopped for recycled paperboard.
Thomas Tait & Sons, Ltd (Scotland); Imperial Bondware Corp.
Annual Report, Montvale, New Jersey: Federal Paper Board Company, Inc., 1992.
Blodgett, Richard, Federal Paper Board at Seventy-Five, Essex, Connecticut: Greenwich Publishing Group, Inc., 1991.
—Wendy J. Stein