The past decade has been a punishing one for shareholders of pulp-and-paper companies, and the current low level of returns is expected to continue. Notwithstanding a series of acquisitions in early 2000, the industry remains fairly fragmented, and legal constraints generally limit concentration. Even in segments that are fairly concentrated, independents are numerous enough to make competition fierce. Meanwhile, international players apply pressure wherever regional price umbrellas appear. Thus the pulp-and-paper industry, despite a certain amount of consolidation, has created less long-term value than have other asset-intensive basic-materials industries (Exhibit 1).

As if the structure of the industry wasn’t difficult enough, almost no pulp-and-paper companies have managed to develop significant intangible or privileged assets (such as proprietary technology or patents) or superior operational practices. Both of these failures exert intense commoditization pressures. Management’s propensity to spend capital in good times and to cut back in bad amplifies the industry’s cyclical nature and compounds all of these problems.

Depending on where companies stand between the trough and the peak of the business cycle, their valuations range from one to two times book value. No surprise, then, that the industry is losing the war for talent, and doubly so in the...