The Infamous UPM-Stora Meeting

Today’s history lesson, paper-market observers, regards the discussions a UPM executive and a Stora Enso executive had in 2002 about the need for market leadership in the "fragmented" North American market for publication papers.

I alluded to the meeting in yesterday's item about coated paper prices but thought it would be enlightening to provide details, especially for those of you who think private equity is the root of all evil in the paper industry. Both UPM and Stora are publicly traded.

The passage below is from a document Stora itself submitted at its criminal antitrust trial:

In January 2002, UPM promoted Markku Tynkkynen to become the President of its Magazine Paper Division. As President of the Division, Mr. Tynkkynen was responsible for magazine paper sales and operations on a global basis, including within North America. At the time of his appointment, prices for magazine paper market in the United States were the lowest they had been in years. In an effort to improve sales in the U.S., Tynkkynen restructured the Magazine Paper Division and hired Heikki Malinen as the head of sales in North America. Mr. Malinen developed a sales plan — referred to as a “go to market” approach — to increase UPM’s market share. Under that plan, UPM’s policy was to be a price follower — in other words, to follow a competitor’s price increase announcements — rather than a price leader.

In the late summer of 2002, Mr. Tynkkynen contacted SENA’s President Kai Korhonen while Mr. Korhonen was in Finland visiting his family and invited him to lunch at UPM’s headquarters in Helsinki. Messrs. Tynkkynen and Korhonen had known each other for more than thirty years, having begun their careers together at a mill in central Finland and owning vacation homes on the same lake. Mr. Korhonen, an engineer by training, had been serving as SENA’s President since September 2000 and his primary task was to integrate the operations of Consolidated Paper, which had been acquired by SENA’s parent company, into SENA. Mr. Tynkkynen invited Mr. Korhonen to lunch to learn about the challenges associated with operating in the United States, identify SENA’s position in the U.S. market, and to figure out if SENA had the capacity to lead a price increase in the United States. During the course of their lunch, Tynkkynen’s questions about SENA’s position in the market were answered: Korhonen told him that the U.S. market was “fragmented,” with International Paper, SENA, UPM, and MeadWestvaco being of about equal size. Korhonen indicated that SENA was not a price leader in the United States. Tynkkynen knew, however, based on SENA’s past behavior, that it would nevertheless be a price follower—that is, it would follow a competitor’s increase.

Messrs. Tynkkynen and Korhonen met again on November 6, 2002, when Mr. Tynkkynen was traveling in the United States on business. Mr. Tynkkynen was again responsible for initiating and arranging lunch—this time at the Hilton hotel, adjacent to Chicago’s O’Hare airport. At that lunch, Messrs. Tynkkynen and Korhonen discussed various logistical issues, as well as the poor state of the magazine paper market in the U.S. They both agreed that the market was very soft. Given the soft nature of the market, it was clear to Mr. Tynkkynen that the entire industry needed a price increase and, in that respect, SENA and UPM were no different. Based on that fact, and in light of Mr. Korhonen’s representation in August that SENA would not be a price leader, Tynkkynen believed that SENA would be a follower if someone else increased prices.

Ten days after he met Mr. Korhonen met for lunch in Chicago, Mr. Tynkkynen learned, on November 16, 2002, that competitor MeadWestvaco had issued a price increase announcement. He called Mr. Korhonen after UPM had internally decided to follow the increase, but before it issued the announcement publicly. Mr. Tynkkynen was unable to reach Mr. Korhonen, but left him a voicemail message notifying him of the increase and stating that UPM was going to follow. SENA, along with two other paper manufacturers — Sappi and IP — also followed MeadWestvaco’s price increase.

The next price increase occurred in February 2003, when IP announced that it was raising prices on coated, grade 5 paper. On February 10, 2003, the day that IP issued its price increase announcement, Mr. Tynkkynen had an internal meeting with Heikki Malinen, Kevin Lyden, and Hans Sohlstrom, in which they decided that UPM would issue a matching announcement. UPM began calling its customers that day to inform them of the pending price increase.

The following day, on February 11, 2003, while Mr. Tynkkynen was visiting UPM’s Blandin Mill, he received a message that Mr. Korhonen had called. Later that afternoon, Mr. Tynkkynen returned Mr. Korhonen’s call. Mr. Tynkkynen has little memory about the conversation, but to the best of his recollection, there were two topics of discussion: a union vote at UPM’s Blandin Mill and IP’s price increase. Mr. Korhonen told Mr. Tynkkynen that SENA was following the increase. Mr. Tynkkynen responded by indicating the UPM had already issued an announcement. That day, both UPM and SENA issued letters announcing the planned price increase. Norske Skog North America and Madison-Myllykoski issued similar announcements on February 12 and 13, respectively.

Stora’s argument was that, though Korhonen’s actions violated Stora’s anti-trust policy, the U.S. government could not prove there was an agreement or conspiracy to fix prices. Although the jury apparently agreed and quickly acquitted Stora, civil antitrust litigation has not been resolved.