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Consolidation--Moguls of M&A

August 1999
The commercial printing industry's leading consolidators share their criteria for the art of the deal.


BY ERIK CAGLE


When one of our industry's acquisitions is among the top financial stories on "CNN," it becomes readily apparent that the world of commercial printing consolidation is heating up rather than slowing down.

The highly anticipated deal that saw Quebecor Printing purchase one of the industry's leading consolidators, World Color Press, for $1.4 billion in cash and stock on July 12, was met by a lot of oohs and aahs. It was an impressive post-Fourth of July fireworks display, to be sure, even though many in the industry had been speculating such a transaction would occur.

Whether the deal shifts the tectonic plates of the commercial printing industry or not remains to be seen, but at least it must be viewed as a large golden nugget in the ongoing consolidation gold rush that's taking place throughout the industry.

Printing Impressions contacted several of the most prominent companies in the consolidation arena to solicit their ideal of how to choose a prospective company—who is targeted, how is a value arrived at, where are the cost savings, as well as their overall objectives.

The list of players are, to a degree, incomplete and, unfortunately, such viable candidates as Big Flower Press, Master Graphics, Applied Graphics Technologies and Champion Industries either chose not to participate or did not respond to repeated inquiries. The following participating companies, however, provide an accurate representation of the state of consolidation in commercial printing.

Mail-Well Inc.
Bruce Thompson, senior vice president of corporate development

WHILE the Englewood, CO-based company does not disclose the terms of its acquisitions, it is known that more than $175 million has been invested in company purchases in 1999 and the figure for 1998 easily topples the $200 million mark.

PI: What types of companies are targeted?

Thompson: We focus our acquisition efforts on companies with excellent track records and with management that wants to stay and be a part of a larger, growing organization, and that are, in fact, for sale. We have found that it's not in our best interests to try to convince an owner(s) that he or she should sell their company. This is a personal decision and one that should not be made hastily.

Absent an operational or sales fit with one of our existing locations, we generally would prefer our potential acquisitions to have minimum sales of $7 million to $10 million. This is a bit dependent on the particular segment of our business in which the potential acquisition will operate. For example, the acquisitions in our Printing for Distributors segment tend to be smaller than those in our Envelope segment. With respect to specialization, we do limit our acquisition efforts to companies that are in one of our existing business segments.

In our Commercial Printing segment, we have both web and sheetfed operations and continue to seek and add to our capabilities in each. With the Label segment, we have both pressure-sensitive and glue applied. We would consider potential acquisitions in both areas.

PI: What payment options do you use?

Thompson: In today's stock market environment, we use cash. We will incorporate an earnout feature when circumstances are appropriate, e.g., where the business is growing rapidly and it is difficult to reach agreement on the correct earnings of the business. Earnouts are sometimes a bit difficult to administer, as events subsequent to the closing can cloud the results of the business as it once existed.

For this reason, it is probably better to limit them to a fairly short term. However, earnouts can serve the purpose of bridging a gap.

PI: What formula do you use to place a value on a company?

Thompson: People tend to think of the valuation process as one in which we take EBITDA and multiply it by an objectively determined multiplier. The process is anything but mechanical. Valuation of a company is both a subjective and objective process involving aspects that range from impressions of management and their strategies to EBITDA for the most recent fiscal year.

For Mail-Well, all potential acquisitions have to meet the additional hurdle of being accretive to our earnings per share in the first year.

In an environment of slightly tougher capital markets and increasing pressure on margins, it is our strong view that multiples have declined somewhat and are likely to continue under some downward pressure. Moreover, we tend not to pay for operating synergies or cost savings that might be realized after the acquisition. It is our view that any valuation increase resulting from items such as these should inure to the benefit of our shareholders, as they are the ones taking the risk that such savings, etc., will, in fact, be realized.

PI: How much cost savings does your company bring to an acquisition after buying it, and in what areas (paper, consumables and equipment)?

Thompson: We know that we can bring substantial cost savings to the companies we acquire in these and other areas. The one simple reason: We are a large company and we have more leverage in the marketplace. We are sensitive to existing vendor relationships in acquired companies, but we eventually want our companies to participate in our corporate purchasing programs.

We're generally a very decentralized company. However, purchasing is one area in which significant savings can be achieved through a centralized program(s). Our industry lends itself fairly well to such an approach, as many of our suppliers are common to all of our companies.

PI: What percentage of company presidents have stayed on after the acquisition?

Thompson: Because we emphasize the continuity of management as a part of our initial evaluation of a company, it is very rare for a plant president not to remain in place after the acquisition.

We feel strongly that these businesses should be run on a day-to-day basis at the local level (our decentralized philosophy) and so we rely heavily on the management that has achieved the results that convinced us to buy the company in the first place.

PI: What is the ultimate objective; where are you taking these companies, direction-wise?

Thompson: The ultimate objective is to build value for our shareholders. By making these companies a part of a larger organization that is focused on continuous improvements, we believe we will make them better and make them larger contributors to the value of the overall organization. Over time, providing customers with the best value in printing services will result in achieving an exceptional value for our shareholders. The ability and willingness to invest in new technologies to provide a broad and diverse product line will allow Mail-Well to better serve its customers.

Consolidated Graphics
Joe R. Davis, chairman and CEO

HOUSTON-based Consolidated Graphics is coming off a successful acquisition campaign, having paid $61.8 million in cash in the fiscal year that ended March 31, 1999. In the process, the company also issued approximately 1.5 million shares of common stock.

PI: What types of companies are targeted?

Davis: Consolidated Graphics seeks strong, well-managed commercial printing companies with $2 million to $35 million in annual revenues.

Our companies have a very service-oriented philosophy, so we are interested in acquiring printers that share this service focus. Today, our company has operations in 25 states and we are negotiating with companies in all regions of the United States.

PI: What payment options do you use?

Davis: Our acquisitions are structured based upon terms that are mutually agreeable to the parties. Tax and estate issues are considered in determining the consideration to be paid to the seller. As a result, we have transactions that are cash only, cash and stock, cash and note payable. Additionally, some of our acquisitions have additional incentives tied to future performance.

PI: What formula do you use to place a value on a company?

Davis: Once we have decided to purchase a company, there are many different economic and business criteria we consider in determining a purchase price. Earnings and cash flow, quality of the company's customer list, age and condition of the equipment, whether there is any real estate, etc. After considering all of these factors in our model, we arrive at a price, which has generally fallen within a range of three to five times trailing 12-month EBITDA.

PI: How much cost savings does your company bring to an acquisition after buying it, and in what areas (paper, consumables and equipment)?

Davis: We are able to negotiate substantial national purchasing advantages that were not previously available to the acquired company. We save money on everything we buy—from materials and supplies like paper, plates, film and ink to capital assets like presses, prepress equipment and bindery systems.

Generally, these types of savings on film, plates, paper, ink and other supplies improve gross margins at acquired companies from 400 to 600 basis points, giving our companies a significant advantage over competitors in the local market.

PI: What percentage of company presidents have stayed on after the acquisition?

Davis: When we buy a company, it is our strong preference that the former owners stay on to run the company. Of the companies we have purchased over the last two years, more than 90 percent of the company presidents have remained after the acquisition. We want to capitalize on their experiences in the market and on their expertise in general.

PI: What is the ultimate objective; where are you taking these companies, direction-wise?

Davis: Our corporate philosophy is to combine the service and responsiveness of the individual commercial printing company with the financial, managerial and operational advantage available with a larger organization. Simply stated, we want to grow and improve the profitability of our individual companies. To accomplish this, we invest in the latest technologies in all areas of our business—from prepress to the pressroom to the bindery. Our superior resources provide an advantage for our individual companies.

Cunningham Graphics International
Gordon Mays, executive vice president

CUNNINGHAM Graphics is one of the newer players in the consolidation game. Even so, it has enjoyed a meteoric rise. The Jersey City, NJ-based printer went public in 1998, a year that saw it post a respectable $15 million in consolidation outlays. That figure has more than tripled to nearly $50 million thus far in 1999.

PI: What types of companies are targeted?

Mays: We look for companies that fit our acquisition criteria. Geographic dispersion is attractive, but in major markets or financial centers (we are in London, Hong Kong, New York, Boston and Toronto). San Francisco/Los Angeles is a current focus. Companies must be financially strong/profitable and have solid growth prospects in their markets. An excellent management team is key, as we keep current management while investing in the company's growth. We also look for complementary acquisitions in existing markets offering a technological advantage of diversity of services.

PI: What payment options do you use?

Mays: We fund deals using stock and cash. Stock is dependent on current price and strategic issues such as control. All of our deals have earnouts, between 20 percent to 40 percent. We also have contracts with key management and personnel.

PI: What formula do you use to place a value on a company?

Mays: We use a variety of measurements to value the company: financial, operational and market. Our program measures and grades each area using a weighted factor. We price a deal using a multiple of EBITDA. It is not the only measure, but has become an industry standard.

PI: How much cost savings does your company bring to an acquisition after buying it, and in what areas (paper, consumables and equipment)?

Mays: How much cost savings can depend on the state of the firm when we acquire it. We do look to save on the cost side, leveraging our financial, purchasing and operational capabilities. In addition, we look to grow the company, thereby maximizing capacity and scale, and increasing profits.

PI: What percentage of company presidents have stayed on after the acquisition?

Mays: One-hundred percent. We look to have key management stay on to participate in the company's growth. If the company has a strong management team and the president desires an exit, we will structure a plan to phase the transition or succession.

What is the ultimate objective; where are you taking these companies, direction-wise?

Mays: We are looking to create a global graphic communications firm, serving major corporate clients in major markets. We use the diversity of our geographic locations and services to provide a one-stop, distribute-and-print service to our clients.

Printing Arts America (PAA)
Terry Tevis, president and CEO

THE privately-held Westport, CT-based company does not disclose consolidation price figures, but there is little doubt to its status as a major player in the realm of acquisitions. Printing Arts America has acquired 10 companies in the past 15 months and has watched its overall sales climb to $200,000,000.

PI: What types of companies are targeted?

Tevis: We continue to buy companies that are located and compete in one of the 26 major markets. With 85 percent of the population in these markets, it enables the PAA divisions to compete in a robust environment where the company can gain share at the expense of less market-driven competitors.

The size varies with the application—digital companies being less than $5 million, while traditional commercial offset firms tend to be between $5 million and $40 million.

PI: What payment options do you use?

Tevis: Our purchase price is driven off an EBITDA multiple. The owner is paid in cash and then we require him/her to roll over anywhere from 10 percent to 20 percent of the purchase price back into PAA stock. This links owners to the company for the long haul and keeps their valuable team in place to drive shareholder value.

PI: What formula do you use to place a value on a company?

Tevis: Depending on age of the equipment and the depth of the customer list, the multiple range is from 4.5 to 5.5 times EBITDA. Share price accretion does not work if we get to six times or beyond.

While we are privately held, our shareholders look at the arbitrage value of a public company to determine our overall valuation. Deals more expensive than 5.5 multiples make it difficult to add to long-term shareholder value.

PI: How much cost savings does your company bring to an acquisition after buying it, and in what areas (paper, consumables and equipment)?

Tevis: Our purchasing philosophy is to single-source most major items—insurance, health care, ink, plates, film and one major, national merchant along with one local, support merchant. For a vendor to gain market share, certain economies are negotiated on terms, volume rebates and general pricing levels.

These rebates flow into corporate and are returned to the division quarterly. We want to retain the cost savings gained through consolidation and not see them migrate to the marketplace. These savings add to the accretion model of any consolidation.

PI: What percentage of company presidents have stayed on after the acquisition?

Tevis: One-hundred percent of the 10 company presidents are on board.

PI: What is the ultimate objective; where are you taking these companies, direction-wise?

Tevis: We are not consolidating companies to meet classic roll-up objectives. Our goal from the beginning was to build a national company that capitalizes on the skill sets and market potential of regional dynamics. While 95 percent of the work comes into the platform within a 50-mile radius, there are those corporate accounts that want JIT to major markets, variable data for their customers and the ability to deal with one company that specializes in a value-added platform.

We are building a company based on the market demand, not supply. Hence, we only buy companies in the major cities with solid sales growth. Once we reach the critical mass necessary to meet Wall Street's IPO requirements, we will move in that direction.

A public offering will limit our debt leverage and provide capital to continue the business development. Some consolidators went to the market too soon and their stock suffered from this early entry. We do not want to make that mistake.

Nationwide Graphics
Carl Norton, chairman and CEO

THE city of Houston, it seems, is big enough for acquisition giants Consolidated Graphics and Nationwide Graphics. Nationwide has definitely found its chunk of the action, registering a lusty $70 million in consolidation investments thus far in 1999, overshadowing a 1998 figure of $40 million that deserves an asterisk, since the company only began making acquisitions midway through that year.

PI: What types of companies are targeted?

Norton: Nationwide Graphics targets commercial printing and graphic arts companies with annual revenues ranging from $5 million to $30 million. Once one or more companies of that size are acquired in a particular geographical area, Nationwide is interested in acquiring smaller companies that can be "tucked in" so long as they are located in the same geographical area.

Nationwide would prefer to acquire a company that serves a relatively large print market so that "clusters" of other complementary printing and graphic arts companies can be added in the future.

In southern Florida, for example, Nationwide Graphics acquired a printing company that derived approximately 35 percent of its revenues from prepress services and the remainder from printing (utilizing 40˝ presses).

Then it acquired a second Miami company that provides printing, state-of-the-art fulfillment and mailing list management services. Recently, Nationwide Graphics completed the acquisition of another Miami printing company that offers no prepress services but prints utilizing 28˝ presses. As you can see, from this "cluster" of companies, Nationwide will be able to offer a full complement of services and it has the opportunity to cross-sell services between the acquired companies. Nationwide Graphics is hopeful that a subsequent acquisition in southern Florida will be a company that offers web printing services, which can be cross-sold throughout that southern Florida cluster.

PI: What payment options do you use?

Norton: Nationwide Graphics utilizes cash, subordinated notes, subordinated convertible notes and, on occasion, earnouts. Nationwide's common stock is not publicly traded, so it doesn't offer stock in connection with its acquisitions.

PI: What formula do you use to place a value on a company?

Norton: Nationwide Graphics will usually base its purchase price on earnings before interest, taxes, depreciation and amortization after adding back mutually acceptable, nonrecurring expenses (the "adjusted EBITDA"). Then, depending on numerous factors including depth of management, historical growth rate, profit margins, geographical locale, etc., Nationwide will multiply the adjusted EBITDA by a multiple. Thereafter, Nationwide will reduce that product by the aggregate amount of interest-bearing debt and capital leases. This will result in the proposed purchase price.

PI: How much cost savings does your company bring to an acquisition after buying it, and in what areas (paper, consumables and equipment)?

Norton: The savings Nationwide Graphics brings after an acquisition is completed depends on a number of factors, including the number of other acquired companies in the same geographical locale, the type of paper used by the acquired company and the mix of consumable prepress supplies (plates, film, paper, ink) utilized before the acquisition.

PI: What percentage of company presidents have stayed on after the acquisition?

Norton: A vast majority (over 90 percent) of the plant presidents have stayed after the acquisition. They are induced into staying by being offered employment agreements, stock options at the time of an IPO, etc. Nationwide would prefer that an acquisition be seamless regarding employees.

What is the ultimate objective; where are you taking these companies, direction-wise?

Norton: The companies that Nationwide Graphics acquires will be in various high-growth areas and will operate in clusters so that services can be cross-sold and workloads leveled. Once Nationwide Graphics has reached the critical size and, assuming the capital markets are favorable, it will investigate the possibility of consummating an initial public offering (IPO) of its securities.

Integrated Graphics (IGI)
Peter Faucetta Sr., chairman and CEO

THE New York, NY, M&A rookie hit Park Avenue just this past February, but has already blazed a trail that includes a staggering $125 million in acquisitions.

PI: What types of companies are targeted?

Faucetta: We are basically looking at companies with at least $10 million to $20 million in revenues, which will complement our existing network by either increasing capacity or providing additional graphic services that would benefit our clients. With regard to geography, we are considering companies that will fortify our position in regions where we are already established or will help establish IGI in other geographical locations that house large print buying markets.

PI: What payment options do you use?

Faucetta: The majority of the purchase price would be paid in cash, with a small part in IGI stock. We want to retain existing management and the stock portion provides an incentive for management with a lot of upside potential.

PI: What formula do you use to place a value on a company?

Faucetta: We do not have a set formula—the value is determined by the strength of the company, its customer base, the quality of the management and its fit with IGI. Ultimately, this translates into a multiple of EBITDA.

PI: How much cost savings does your company bring to an acquisition after buying it, and in what areas (paper, consumables and equipment)?

Faucetta: The amount of cost savings depends upon the size of the acquisition. By taking advantage of the combined purchases across the IGI companies, we have achieved significant savings. Also, we've reduced cost in a number of administrative areas such as insurance and health benefits.

PI: What percentage of company presidents have stayed on after the acquisition?

Faucetta: All of the plant presidents have remained after the acquisitions, except one. However, in that situation, we knew the president was planning to retire and it was agreed that the vice president would remain and run the plant.

PI: What is the ultimate objective; where are you taking these companies, direction-wise?

Faucetta: Our ultimate goal is to become the most comprehensive graphic arts service provider in the industry with service hubs strategically located throughout the country.

Kelmscott Communications LLC
Ron Jensen, president and CEO

The newest of the new consolidators, Kelmscott recently closed on its first three acquisitions. The San Rafael, CA-based company is privately held and chose not to disclose any figures.

PI: What types of companies are targeted?

Jensen: We are building a national printing company, both sheetfed and web. While we are primarily targeting companies in the $5 million to $35 million range, we will acquire a much larger company (or companies) if we feel the addition creates strategic advantage.

Regarding specialization, the core business will be sheetfed and web printing. However, we believe the market values a graphic arts provider that can supply a broad range of services, including some of the new Internet products and services. As a result, we will also purchase companies that complement our core printing business, with the aim of providing more expansive customer solutions.

PI: What payment options do you use?

Jensen: We use a wide variety of payment options necessary to satisfy the sellers' objectives. We do, however, emphasize a cash payout.

PI: What formula do you use to place a value on a company?

Jensen: The formula depends upon the conditions surrounding each individual situation. Of course, we offer competitive market valuation.

PI: How much cost savings does your company bring to an acquisition after buying it, and in what areas (paper, consumables and equipment)?

Jensen: By power-buying materials and equipment, we can bring savings to all of these categories.

PI: What percentage of company presidents have stayed on after the acquisition?

Jensen: Since we are a new printer, we have not had anyone leave. However, all three of our company presidents are excited about Kelmscott's strategy of operating excellence and plan to remain with the company for quite some time.

PI: What is the ultimate objective; where are you taking these companies, direction-wise?

Jensen: Our objective is to build an outstanding operating company. If you aggregate known synergies, marketing opportunities with national purchasing organizations and operating excellence, improved enterprise profitability will be the result.
 

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