Stone Container Corporation
Stone Container Corporation
Stone Container Corporation is the world’s largest manufacturer of containerboard, for shipping boxes, and a major manufacturer of paper bags, newsprint, white papers, and wood products. Founded in 1926 as a jobber of packing materials and office supplies, Stone was forced into manufacturing by Depression-era government regulation. Over the years, the company expanded geographically and bought undervalued assets. With the ascension in 1979 of Roger Stone, the fourth Stone to lead the company, Stone Container began an aggressive campaign of leveraged acquisitions. Between 1979 and 1989 sales increased more than 1,600%.
Stone Container’s beginnings go back to 1926 when Joseph Stone, an immigrant, in 1888, from Russia, left his position as a salesman for a paper jobber and, with his life savings of $1,500 and his sons Norman and Marvin, created J.H. Stone & Sons. Together the three men set up shop in a former wholesale grocery operation at 120 North Green Street, just west of Chicago’s downtown, in an office they shared with a customer and family friend. Building on the selling experiences of Joseph and Norman Stone, the Stones became jobbers of shipping supplies—wrapping paper, bags, tissue paper—and related industrial supplies. The company was a success. During the first fiscal year, which ran 15 months, sales totaled $68,000 and profits equaled $13,500. In 1928, Jerome Stone, the youngest of the three Stone brothers came into the business. The same year, J. H. Stone & Sons began jobbing corrugated boxes.
As Joseph Stone began to slow down, his three sons began to run the company together. If there was a disagreement, the single loser always then agreed to support the decision of the majority. With a simple management system in place, the Stones built their early success on service. They kept little in stock and only occasionally bought for inventory. As the company grew, it moved to larger quarters several times in the early days all within Chicago; ending up on 74th Street, with 55,000 square feet, in 1937.
The Great Depression pushed J.H. Stone & Sons into manufacturing. The National Recovery Act, which President Franklin D. Roosevelt signed into law in 1933, outlawed price cutting. Jobbers such as J.H. Stone & Sons would not get their merchandise at a discount, and Stone’s customers would have to pay a premium for Stone’s services.
The company needed a cheaper source of supplies, so the Stones explored manufacturing. The opportunity came late in 1933, when the company’s principal supplier closed a nearby plant and offered to sell the Stones five pieces of obsolete equipment that converted corrugated sheets into boxes. Accepting the offer, J.H. Stone & Sons paid $7,200 for “Big Betsy,” as the machines came to be known, and the services of a technician to help with installation. In 1936 the company moved one step closer to self-sufficiency with the purchase of a second-hand corrugator, for $20,000. The same year, founder Joseph Stone died. Volume grew and in 1938 the Stones decided to erect their own plant. The 150,000-square-foot building in Chicago was the first plant anywhere devoted exclusively to the manufacture of corrugated boxes. Completed in the summer of 1939 at a cost of $382,000 it was built to order for Stone & Sons by the Central Manufacturing District, an authority of the City of Chicago. Also that year, the company reached $1 million in sales for the first time.
In all of these early ventures, the Stones paid with cash on hand or paid off their loans early. To pay for the new plant, they took a 20-year loan at 6% interest, but they paid off the debt in less than three years.
During World War II, when the government was sending aid and arms overseas, almost everything was packed in corrugated boxes. Since J.H. Stone & Sons’ war priority rating was high, it had no problem with material shortages. The Stones continued to expand in the face of a good market. In 1943 Norman Stone learned of a corrugated box company in Philadelphia, Pennsylvania, that was for sale. Light Corrugated Box Company was two-thirds the size of J.H. Stone; it was also Stone’s first venture outside of the Chicago area. After acquiring the company for $1.2 million, the brothers found they needed a resident manager, and for the first time, they brought in a nonfamily general manager, David Lepper.
After World War II the growing company incorporated as Stone Container Corporation. Demand skyrocketed, and raw materials grew short. Chief executive officer Norman Stone saw both opportunities for expansion and a need to control raw materials. With these in mind, Stone Container acquired two mills in 1946, the first being a $1.2 million box-board mill in Franklin, Ohio. Since Stone container did not need box-board, the raw material used in rigid boxes and folding cartons, the box-board machines were converted to the production of jute linerboard, then used as the outer layers in corrugated containers. The second was a $575,000 Coshocton, Ohio, mill that produced corrugating medium—the fluted material sandwiched between linerboard layers in corrugated containers—from straw. To pay for the two Ohio mills, Stone Container borrowed $2 million, and paid off the loan in one year.
In 1947 Stone Container issued 250,000 shares of common stock and became a publicly owned company. No longer completely family owned, the brothers began working to attract outsiders to management positions.
The company found that its two big Ohio paper mills had enough capacity to supply the Chicago and Philadelphia plants and to sustain an additional corrugated-container plant. Stone Container, therefore, built a new corrugated-container plant, in the industrial area of Mansfield, Ohio. The plant was completed just before the Korean War began in 1950.
During the Korean War demand was high, and Stone Container sought to expand capacity. In 1950 Norman Stone heard of a mill at Mobile, Alabama, that had been taken over by the Reconstruction Finance Corporation, a federal agency. Within a year, Stone Container had bought the mill and converted it to the manufacture of jute linerboard.
During the 1950s the expansion of supermarkets and self-service outlets began to change the face of retailing. Containers became more than a means of conveying merchandise from producer to consumer. Producers began to see boxes as a means of advertising. On the crest of that wave, Stone became a pioneer in advertising on the exteriors of boxes.
The 1950s were also a period of aggressive geographic expansion for Stone Container. As it was not economical to transport corrugated boxes more than about 125 miles, Stone Container located plants near its customers. First the company would identify a market, then it would build or buy a box plant in that area, and finally it would find the paper supply to feed the plant with raw materials. Among the box companies Stone Container acquired during the 1950s were: W.C. Ritchie & Company of Chicago in 1955; Western Paper Box Company of Detroit in 1956; and Campbell Box & Tag Company of South Bend, Indiana; Acme Carton Company of Chicago, and Delmar Paper Box Company, the latter three in 1959.
Along with geographic expansion came diversification. Until 1954, Stone Container had confined its operations to the manufacture and sale of corrugated containers and paper-board. By 1960 it was selling folding cartons, fiber cans and tubes, tags, and special paper packages, due in great measure to the acquisition of W.C. Ritchie & Company, a manufacturer of high-grade paperboard-product packages.
While Stone was expanding rapidly and becoming a force in the industry its primary raw material, jute linerboard, was losing ground to the lighter, stronger kraft linerboard. To stay competitive, Stone had to buy kraft linerboard from other paper companies. Although the kraft linerboard shortage became apparent in the late 1950s, CEO Norman Stone was not able to address the problem until 1961, when Stone Container organized and took a 65% equity share in South Carolina Industries (SCI). Through SCI, Stone Container built a completely new kraft linerboard mill at Florence, South Carolina, a mill capable of producing 400 tons of board a day. Begun in 1962, during an economic recession, and financed through Northwestern Mutual Life Insurance, the SCI mill was completed in 1964 at a cost of $24 million, more than Stone Container’s entire net worth at the time.
By the early 1960s Stone Container was consolidating its gains. The advertising revolution was complete, and in 1961 nearly all of its containers were designed specifically for a customer’s product and market. The same year, Stone moved its corporate offices to North Michigan Avenue in Chicago, an office tower that was renamed the Stone Container Building. In 1962 the company was listed on the New York Stock Exchange. With the opening of the South Carolina mill in 1964, Stone for the first time became a fully integrated company, supplying virtually all of its own raw materials.
During the economic slowdown of the late 1960s and early 1970s, the company continued expanding. It spent $35 million in capital expansion, diversified with a plastics packaging division, and in 1974 bought Lypho-Med, a dry-freeze pharmaceutical manufacturer. Although operations kept expanding, Stone Container resolutely stayed out of the forestry business. According to Chairman Jerome H. Stone, who spoke with Paper Trade Journal in January 1977, the investment would have been too much. “For us to become self-sufficient we would need 300,000 acres of land. At $300 to $400 per acre we would have to justify an investment of $100 million. At the present time I don’t see any way of obtaining a reasonable return on that investment.” According to Stone, the Florence mill had 110 good suppliers of wood during the 1960s and 1970s.
In the early 1970s Roger Stone, then vice president of the containerboard division and later chief executive officer, saw industry leaving the Northeast. He realized that his primary customer base was shrinking and that he needed to re-orient production in some geographic sectors toward a more consumer-based market. To that end Stone set out to boost sales of boxes to customers making nondurable consumer products, like foods, beverages, and toys, to 75% of total sales.
By 1975 the Stone family’s ownership was some 62% of the company’s stock. Yet the Stones continued to work hard to assure that Stone Container was a truly public company. They promoted heavily from within. Three family members were in the company’s upper echelons: Jerome as chairman and chief executive officer, Roger as president and chief operating officer, and Alan as vice president, marketing.
Expansion continued, and in 1975 the company entered the Minneapolis-St. Paul, Minnesota, corrugated-container market by buying National Packaging for $6.05 million. In the face of expansion, however, earnings slumped, falling from a 1974 high of $1.87 per share to 90C in 1978.
In 1979 Roger Stone became CEO of Stone Container. Son of Marvin Stone, one of the original founders, he was the second youngest of five cousins. Roger Stone had joined Stone Container as a sales representative in 1957, and become president in 1975.
In 1979 Boise Cascade proposed a merger, offering some $125 million in cash and stock to buy Stone Container’s outstanding shares, more than twice the company’s market value. The Stone family, which at that time owned about 60% of 7.7 million shares mulled over the offer, and initially chief executive officer Roger Stone was in favor of accepting it. With signs of an upturn in the paper market, however, Stone Container pulled out of the deal and decided to remain public. With that commitment to the future of the Stone Container Corporation, Roger Stone began an aggressive expansion campaign that would eventually make the company one of the largest paper manufacturers in the world.
Roger Stone’s idea was to buy capacity from disenchanted or financially distressed producers. In that way he would neither increase industrywide capacity, possibly leading to a bust in container prices, nor incur the tremendous costs of building new plants and buying new machines. In a May 1, 1981, interview with Financial World Stone said, “We were willing to make that commitment when demand was down. That is when you should commit, when nobody else really wants to.” In 1979, a low point in the business cycle, Stone ordered a $55 million expansion of the then wholly owned, ultra-efficient Florence linerboard plant. Then in 1981 he had Stone Container buy an equity position in Dean-Dempsy Corporation, a wood-chip fiber source. The Dean-Dempsy acquisition made Stone Container the 13th-largest producer of boxes in the United States.
The rest of the 1980s saw Roger Stone making larger acquistions. His was a leveraged buyout strategy. With banks and junk bond innovator Michael Milken and the then powerful Drexel Burnham Lambert supplying ready cash, and chief financial officer Arnold Brookstone devising ingenious financial strategies, Stone Container quintupled its annual capacity by 1987, to 4.8 million tons, at a cost that was one-fifth that of new plants. Like his predecessors, Roger Stone bought during down times, and paid his debts when prices rose. His feeling for the business cycle was keen.
In October 1983 Stone Container paid $510 million for Continental Group’s containerboard and brown-paper operations; 1983 was a bad year in the industry and Continental needed cash. Stone was able to buy 3 highly efficient paper mills, 15 corrugated box plants, 5 bag plants, and the cutting rights to 1.45 million acres of timberland for about one-third of the replacement value of the mills alone. Paid for with a $600-million loan, boosting debt to 79% of capital, and the first equity offering since 1947, which cut the family’s share from 57% to 49%, the Continental purchase doubled Stone Container’s annual capacity to 2.3 million tons and made Stone the nation’s second-largest producer of brown paper behind International Paper. After the Continental purchase, containerboard prices increased, and Stone was able to pay down its debt significantly.
In October 1985 Stone paid $457 million to buy 3 container-board mills and 52 box-and-bag plants from Champion International Corporation. With this purchase, Stone’s debt again soared, to about 70% of capitalization. The deal also gave Champion the option to buy 12% to 14% of Stone’s stock at a higher price in the early 1990s. The Stone family, however, still owned 37% of the company.
In 1987 Stone paid $760 million to buy Southwest Forest Industries, a containerboard company that also made newsprint. The acquisition of Southwest’s 2 large pulp and paper mills, 19 corrugated container plants, and assorted plywood and veneer plants, lumber mills, railroads, and private feetimber made Stone the nation’s largest producer of brown paper, including corrugated boxes, paper bags, linerboard, and kraft paper.
According to some analysts, the acquisitions were taking a toll. Stone had more than $1.44 of debt for each $1 of equity. To shake some of the debt, Brookstone spun off Stone Container’s wood-products businesses as Stone Forest Industries (SFI). By selling shares in the new company, which was still controlled by Stone Container, the company obtained cash and spun off a portion of its own debt. While Brookstone was dealing with the debt, the economy was running hot. Stone Container plants were operating nearly at full capacity, and the company was able to meet its obligations. The family’s share fell to 30%.
In 1988, after the SFI acquisition, CEO Roger Stone set a goal of making the Stone Container Corporation a major force in packaging, newsprint, and market pulp—the material used to make fine paper—throughout North America and Europe. Stone predicted that after European economic integration in 1922 there would be an explosion in packaging as firms shipped goods around the continent. He wanted Stone Container to be there when it happened. In pursuit of this strategy, Stone Container made the biggest acquisition in its history. In March of 1989 Stone paid $2.2 billion in cash and securities for Consolidated-Bathurst Inc. (CB), Canada’s fifth-largest pulp-and-paper company. The purchase made Stone Container the world’s second-largest producer of pulp, paper, and paper-board; a major player in newsprint; and gave Stone Container a foothold in the European market through CB’s Europa Carton subsidiary and U.K. plants.
While some analysts worried about debt, which increased to 70% of capital, and fluctuations in the newsprint market, which tumbled alarmingly just as the deal was going through, others lauded the strategic benefits of becoming a truly international company, especially with the coming economic integration of the European Community. Unlike earlier acquisitions, in the Consolidated-Bathurst deal Stone had paid full price for a well run company—a 47% premium over the market price at the time. Investors worried about the $3 billion debt load, and prices for newsprint slipped 14% in the year following the acquisition. With investors jittery about debt and an economic slowdown in the works, stock prices fell from a 1988 high of $39.50 to $8.50 in October of 1990. In 1989 the company disposed of some debt by selling $330.4 million in noncore assets, and in 1990 cash flow remained more than adequate to meet obligations.
In 1990 the 10th-largest forest-products company in the world and the world’s 248th-largest industrial company, Stone Container Corporation was trying to digest its biggest acquisition yet. Stone container is on the verge of becoming a worldwide presence. At the dawn of the 1990s, with more than $3 billion in debt and the paper market on a down cycle, Stone Container must make it through some tough times before it again reaches heights of profitability.
Stone Resource and Energy Corp,; Stone Forest Industries Inc. (49%); Stone-Consolidated Newsprint Inc.; Stone-Consolidated (Canada); MacMillan-Bathurst Inc. (Canada); Europa Carton (Germany); Empaques de Carton Titan, S.A. (Mexico); Stone Forestal S.A. (Costa Rica).
Stone, Marvin N., and Jerome H. Stone, Stone Container Corporation, New York, The Newcomen Society in North America, 1975; Lund, Herbert F, “Stone Container’s first 50 years just a springboard to much greater growth,” Paper Trade Journal, January 1, 1977; Simon, Ruth, “They thought we were a little crazy,” Forbes, September 21, 1987.