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Compass Case Study

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Company Description

Deluxe Corporation is the largest supplier of checks in the United States, providing check printing services for about 10,000 financial institutions and selling direct to small businesses and consumers. The demise of the check has been widely predicted for the past two decades because of the spread of ATMs, increasing use of credit and debit cards, and - more recently - Internet payment/on-line banking options. Yet in the U.S., checks continue to be consumers' preferred method of non-cash payment. According to the Federal Reserve, some 42 billion are written each year.

Still, the volume of checks written has declined from their mid-1990s peak of around 50 million as debit card use has soared, and Deluxe's unit volume has declined 5%. Deluxe also faces challenges as banks continue to consolidate. Financial institutions accounted for 80% of checks ordered by consumers and small businesses, and as mergers produce larger institutions, Deluxe faces pressures to cut prices due to higher volumes. To address these challenges the company has sought to build its direct-to consumer business and offer checks with premium-priced designs as well as offering value added services to financial institutions (e.g., outsourced check ordering through Deluxe's own call centers).

Between 2000 and 2002, the company offset the impact on volume declines by increasing it's per unit revenue realization by 7%. Deluxe's strategy also focuses on customer retention and, responding to pricing pressures, improving customer profitability through ongoing cost reduction efforts across its entire business system.


In early 1996 Deluxe announced plans to trim operating costs by $150 million over a two-year period. Included herein was the planned closure of 26 of the company's 41 check-printing plants, a 30 percent reduction in capital spending, the implementation of a centralized purchasing function, and layoffs for 30 percent of the company's officers. Divested in 1996 were T/Maker Company, Health Care Forms, Financial Alliance Processing Services, Inc. Deluxe U.K. forms, and the internal bank forms business. Deluxe also placed Paper Direct and Current Social Expressions on the block, although it ran into initial trouble trying to find a buyer.

A restructuring of the remaining operations left Deluxe with four main business segments in 1997. Deluxe Paper Payment Systems consisted of the check printing services that remained the company's core, including Current Checks and Deluxe Canada Inc., which had been formed in 1994 to provide Canadian financial institutions with checks and financial forms. Deluxe Payment Protection Systems included account verification (Chex Systems), check authorization (SCAN), and collection agency (National Revenue) services, as well as the TheftNet employee screening service run by Deluxe Employment Screening Partners, Inc., a new subsidiary established in 1996. Deluxe Direct Response specialized in the development of targeted direct-mail marketing campaigns for financial institutions, with four of its five units having been acquired or established in 1996 and 1997. Finally, Deluxe Electronic Payment Systems, Inc. grew out of the 1986-acquired A.O. Smith Data Systems and concentrated on electronic funds transfer services.

In 1997 Deluxe began offering check ordering over the Internet. The following year brought several divestments. PaperDirect and Current Social Expressions were finally offloaded, as were the Deluxe Direct Response unit and the renamed ESP Employment Screening Partners subsidiary. Continuing to trim noncore operations, Deluxe sold NRC, its collection agency business, in December 1999. On the acquisition side, the company in February 2000 spent $97 million for Designer Checks, Inc., a producer of specialty design checks and related products for direct sale to consumers.

In the meantime, the company had acquired eFunds Corporation, a provider of electronic check conversion and electronic funds transfer services, for $13 million in February 1999. Then in January of the following year, Deluxe announced plans to combine all of its electronic payment and information technology businesses, including eFunds, Deluxe Payment Protection Systems, ChexSystems, and SCAN into a single entity, and then spin it off into an independent publicly traded firm called eFunds Corporation. These moves were designed to create two separate, "pure-play" companies, thereby unlocking value for shareholders. In June 2000 eFunds was taken public through an IPO of 12 percent of its stock, raising $71 million. In December of that year the remaining 88 percent stake was distributed tax free to Deluxe shareholders as a stock dividend. Blanchard left Deluxe to become chairman and CEO of eFunds.

Analysis: Before we begin, it's important to set a context for analyzing the debt. Is this a heavily cyclical company that suffers huge swings in revenue and profitability over short periods of time, or does it have fairly stable sales and profit margins? What is the near and medium term prospects for earnings growth? These are both important points - cyclicals and declining businesses obviously are riskier if they have worrisome debt burdens.

Deluxe's main business is printing and selling checks. This is a fairly stable business - even in poor economic times, folks still have mortgages



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