Has IP bitten off more than it can chew?

Implications: At a time when contraction seems to be the rule (Smurfit Stone having shut down 20 boxplants over the past few years), does IP really see the value in growing their container division by an additional 72 plants? IP's management believes it can cut expenses within 3 years by $400 million including $175 in the first year.  To do this means moving very quickly to incorporate the Weyerhaeuser plants into their own well established plants.  It's questionable whether this is possible since a great deal of analyses will be required (i.e. logistics, corrugator utilization, shedding unattractive pieces of business etc.) How will the financial community view this acquisition?  IP's stock has declined 13% and today trades around 27.  IP has said it will borrow $2 billion as a term loan and  $4 billion as a bridge loan.  Many analysts believe this is a great deal of debt to be taking on when the country appears on the verge of a recession.

Analysis: There are currently 7 major container companies - Smurfit Stone has been the largest with 120 box plants, Weyerhaeuser #2 and IP #3.  Now IP becomes #1 and it will remain to be seen if bigness is the highway to profitability....this at a time when Smurfit Stone is heading in a different direction - that of spending $2 million (each) in installing "super corrugators" at their LA and Chicago plants.
Admittedly IP has acquired a considerable number of attractive properties which includes: 9 fully integrated containerboard paper mills (linerboard, corrugating medium, folding boxboard), 72 box plants, 10 specialty packaging plants, 4 kraft bag/sack plants and 19 recycling plants (of considerable importance in a society where environmental conscientiousness is highly regarded).  IP also inherits 14,300 more employees at a time when many corporations are seeking to reduce employment levels.
IP has announced that it expects to realize a cost savings of $175 million in the first year.   It will be nothing short of a miracle if this can be accomplished since experience has shown that weaving a new acquisition into a huge existing structure takes at least a year for top management just to figure out what are the essentials.  Most cost savings today come from reducing transportation costs, reducing manpower, consolidating similar grades/products on more efficient equipment and shutting down the less efficient plants, etc. While some of this can be accomplished by computer analyses, much of it must be done through group discussions and teamwork.  For example, one of the big questions will be "do we expand our national accounts business or go after the more profitable local, smaller accounts where JIT service can bring higher prices?".  Small and nimble versus big and cumbersome!
But the big question really is whether economy of scale is always the road to greater profitability.  Is there an upper limit?  And then add to that the burden of paying back the $6 billion dollars IP intends to borrow.  Having that big a payback will likely influence many future decisions such as weighing Greater Cash Flow versus Higher Profitability.  Many capital intensive companies have, in the past, have opted to maintain cash flow even when there were no profits.   The market pulp business in Canada is a good example.  Within the past 5 years many mills have shipped pulp at a loss just to keep the money coming in.  This is unpalatible but absolutely necessary when the Banks are putting on pressure.
Now, having said all that about IP, what about Weyerhaeuser?  Why were they anxious to sell this huge, well established division?  According to their management they believe it is to their advantage to concentrate on fewer product lines.  In this case it means focusing primarily on pure timber, wood products and real estate....along with their high volume and profitable Fluff Pulp market pulp business (where list prices are at a heady $900/admt).
It will be most interesting to look at these two companies down the road to see if these decisions were really in each one's best interests!