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What’s Fueling M&A Fever?

April 2007 By Bob Cronin
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OUR INDUSTRY is experiencing some of the most exciting and significant changes it’s seen in decades. We’ve witnessed RR Donnelley’s brigade of acquisitions. We’ve observed Consolidated Graphics’ steady stream of buyouts and all-time-high stock prices. We’ve watched Cenveo’s hostile takeover attempt of Banta get usurped at an unmatchable premium.

Seemingly, not a week goes by that you don’t hear about another big-dollar acquisition, mega-merger or stock deal. And, the activity isn’t just from the majors; graphic arts firms of all sizes are pursuing this new avenue for growth, fueling the interest and investment of the private equity community. The old view of print as a stodgy, capex-intensive venue is no longer true. We’re not looking at the print rollup model of the past, but at strategic positioning through acquisition by public and private investors to produce more attractive returns. Today’s printing industry is rife with opportunity and financial reward.

Of all the transactions at play, perhaps the most notable are those driven by private equity investors. Unlike venture capitalists, which loan money at high rates, and more or less take over a business, private equity investors have a “partnership” mind-set.

They offer growth capital and strategic support that enable high-potential companies to realize their maximum value more quickly. They do not take an active role in day-to-day operations; they function as an “enabler” that shares in a company’s growth—and holds a stake in its future. Private equity offers graphic arts companies a new growth path they cannot achieve on their own, with greater flexibility for ownership exit, succession and long-term viability.

While their interest is relatively new, private equity groups are finding our industry an attractive value proposition. Strong-performing printing companies are cash-positive with wise management teams who position themselves for multiple opportunities. Private equity groups seek out firms that can make the most of these—and deliver their target rate of return.

Consider this activity from private equity investors:

• Genstar Capital buys Fort Dearborn.

• Wind Point Partners buys York Label, Industrial Label, Quality Assured, and others.

• Wellspring Capital buys D.B. Hess and The Press of Ohio.

• Huron Capital sells Printegra and National Imprint to Cenveo.

• Bears Stearns buys Hilltop Press.

Each of these transactions has brought tremendous new opportunity for company growth. Since our firm, The Open Approach, has been closely involved in a number of these transactions, I can assure you the results have been quite favorable for all parties.

Today’s Numerous Options

Increasing M&A activity has, to some extent, produced aggressive, well-financed owners with multiple printing operations. These people have a vision for the business and believe that bigger is better. They have strong cash positions and can readily invest in equipment, facilities and acquisitions to achieve their goals. They are focused on attaining a target rate of return on investment no matter what.

Such thinking has negative consequences, thus it is acutely important to consider what type of exit/succession makes sense for you. Your options include:

Majors (Acquisition/Rollup)—In an acquisition by one of the majors, your return depends largely on your ability to deliver non-redundant products, services, customers or solutions that correlate with their overall strategy. Hence, your impact on the company’s growth and competitive positioning will be key in determining your selling price.

Large, public companies tend to have large revenue bases, often upwards of $10 billion. An acquisition that provides 10 percent organic growth would need to deliver around $1 billion in new annual sales, limiting the transaction to a complex, multiple-acquisition deal.

Plus, any transaction with the majors must be accretive; it’s not just about adding to the revenue base, it’s about delivering new opportunity. And you must be willing to relinquish control. Before considering this option, look at the company’s trading price, and understand it will pay you at a multiple less than its own.

Strategics—A strategic acquirer is any print-related entity that views your enterprise as a boon for business. It could be a competitor or an alliance, friend or foe. It could be considering you from the vantage point of how your products/services expand its position, or the value it gets from taking you off the street.

A strategic buyer typically identifies your company based on an insight into your business—and will take over its management and direction. They may know you’re looking to retire, recently lost a vital account or manager, or other fact that underscores the need for purchase.

The word strategic implies that some advantage is gained from joining properties, businesses and markets. Reality says it’s strategic only if it works.

Private Equity—As noted, private equity firms are investors seeking profitable venues for their stakeholders. They invest in multiple industries, typically targeting a 25-plus percent annual rate of return.

The printing industry offers private equity firms multiple acquisition opportunities; strong market segments with outstanding growth potential, multiple models by which to make a return; and potential for geographic or national platforms.

Private equity firms invest by paying a portion of the buy price using capital from a “fund,” then borrowing the balance at a competitive rate. The return comes from growing your business quickly, paying down the remaining debt and getting a higher multiple at exit.

Certainly, the best potential lies with firms experienced in our industry. They already believe in your company and can support you with strategic direction and accessibility to resources—as well as necessary capital. Large private equity firms buy at a higher multiple if your cash flow is consistent, among other considerations.

Employee Stock Ownership Plan (ESOP)—Under an ESOP, fundamentally, you give your employees shares of the company based on what they helped you earn. If you are seeking retirement, a financial institution can help employees buy out the company using current cash flow. Although an ESOP offers a relatively easy and expeditious exit/ownership transfer, it does nothing to ensure the future of your hard-earned business.

Getting Optimum Value

The current M&A market is the best it has been for the last 10 years. Majors, strategics and private equity players are vigorously pursuing new opportunities, and are paying top dollar. If you are seeking an exit, planning a succession, or even looking for a new growth channel, now is the time to get in.

There are several steps to ensure your maximum draw—today and for the future. Our experience in M&A has shown that companies that secure the best value have:

• A unique niche, vertical market, product, or service.

• An intelligent product/service mix that capitalizes on market dynamics.

• A proven management team with a clear vision and the ability to execute.

• A strong, strategic business plan with compelling competitive advantages.

• Non-concentrated account base (no greater than 20 percent sales with any single customer) and established contracts.

• No immediate need for large capital outlay (offers will be reduced to accommodate).

• Non-union employees (union presence, contract length may impact final price).

• Sales channels (direct sales force is more valuable than trade).

Like every industry, print is cyclical, and there is no guarantee that investment interest will continue. The industry’s ability to succeed is the leading indicator for continued favorable transactions. The second consideration is the cost of capital. If interest rates stay attractive, print deals will continue—from every buyer pool.

In the end, nobody understands your business, goals, people and opportunities as well as you do. The direction you choose depends on what you envision for the future. You’ve worked hard to build your company and have a lot at stake. Consider your options carefully. Hire a consultant for expert guidance. And take advantage of today’s most lucrative opportunity in print. PI

About the Author
Bob Cronin is managing partner of The Open Approach, a boutique consultancy and M&A specialist dedicated to printing. The firm has spearheaded some of the industry’s most lucrative ventures for companies of every size and marketplace, and has been named PIA/GATF’s exclusive M&A recommended partner. Cronin, former chairman and CEO of Wallace Computer Services, can be reached at (630) 323-9700 or at www.theopenapproach.net.
 

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