RRD.WI Donnelley (R.R.) & Sons Co.

Printing major R.R. Donnelley & Sons Company (RRD) recently announced that it has entered into a definitive agreement to acquire Edgar Online Inc. (EDGR) for approximately $70.5 million. Following the news of the acquisition, Edgar Online shares shot up 50% to close at $1.08 on May 22, 2012.

Donnelley expects to make the payment through a combination of $1.092 per share in cash, including Edgar Online’s debt amounting to $1.7 million as of March 31, 2012 and an amount equal to the redemption price of the preferred shares. The acquisition is expected to close during the third quarter of 2012.

Rockville, Maryland-based Edgar Online is a leading provider of financial data, analytics and disclosure management solutions. EDGAR Online is an industry leader in XBRL (eXtensible Business Reporting Language) processing.

The company boasts of an enviable clientele including Donnelley, Moody’s (MCO), Intel (INTC), Verizon (VZ), Oracle (ORCL) and SAP (SAP) to name a few. Donnelley contributed 26.8% of Edgar Online’s total revenue in 2011.

We believe that Donnelley is paying a slight premium for the company (due to the debt it is acquiring). However, we consider the Edgar Online acquisition to be a wise move, given the fact that the traditional commercial printing segment is on a secular decline.

Currently, the company is facing a significant threat from digital technologies that enable much easier transfer, designing, resetting and reproduction of data. This affects big projects, such as books and journals, where printed pages are much higher.

Additionally, with publishers increasingly coming out with digital versions of books and sophisticated e-book readers from Amazon.com Inc. (AMZN) and Barnes & Noble Inc. (BKS) for reading these books becoming increasingly available, the interest in commercially printed paperbacks and hard covers is waning.

Donnelley needs to expand its scope beyond this traditional business and the current acquisition is likely to take it in that direction. Edgar Online is a well established name in the XBRL and disclosure market with a strong clientele.

We believe that the acquisition will diversify Donnelley’s revenue base going forward. Donnelley expects Edgar Online to be accretive from the first year of acquisition.

Recommendation

We believe Donnelley is focusing on acquisitions to expand and enhance its offering to its current customers, as well as to create more opportunities for its products to reach new clients. The company’s continued focus on acquisitions will also spur its already dominant market position and drive long-term growth, in our view.

However, we expect Donnelley to remain under pressure due to weak macroeconomic conditions prevailing in most of its current as well as prospective markets. Moreover, higher pension expenses, continuing pricing pressure, volatility in raw material prices and a highly leveraged balance sheet are significant headwinds going forward.

Thus, we remain Neutral over the long term. Currently, Donnelley has a Zacks #3 Rank, which implies a Hold rating in the short term (1-3 months).

 
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