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Consolidation--The Juggernaut Hits the Wall

May 2000
As the consolidation march pauses to take a breath, the sector's leaders are taking the time to prove to Wall Street that they can manage their new empires.


About this time two years ago, the trade press were using metaphors like "juggernaut" and "tidal wave" to describe the actions of a half-dozen companies in the graphic arts industry, as they began an awe-inspiring crusade to consolidate one of North America's more fractured business sectors. Any metaphor that implied inevitability seemed appropriate. Announcements of new acquisitions came, at times, weekly; sometimes they even appeared daily.

What a difference two years can make. Now, the metaphors about the consolidators have taken on a battlefield flavor. There is talk of front lines, entrenchment and retreat, all implying that, while victory is still possible, it will have to be hard won. The scent of inevitability is no longer in the air.

Companies that made a habit of announcing new acquisitions on a regular basis have not done so for months; companies that went public with great fanfare have seen their stock's value drop precipitously; and a few companies that once publicly predicted grandiose futures have all but collapsed.

Most of the industry's main players agree that what is taking place now is a vicious cycle being spun by the machinery of Wall Street.

"The consolidation slowdown is a product of reduced valuation for publicly held companies," states Ron Jensen, chairman, president and CEO of San Francisco-based Kelmscott Communications, in a succinct summation of the problem.

"Public companies valued below roughly five times their cash flow dilute their earnings when they buy a company above their public valuation. Therefore, consolidation stops. There is no way a publicly held company can avoid or reverse the situation. The 'arbitrage' between the cost of purchasing a company and the public valuation drives consolidation.

If that arbitrage dis-appears, consolidation stops."

But while the trouble may be most visible on Wall Street, Carl Norton, chairman and CEO at Houston-based Nationwide Graphics, thinks much of the blame belongs in the industry's own back yard.

"Too many companies were getting funding in order to make acquisitions," he explains. "Many were making acquisitions without an adequate amount of due diligence and, along the way, acquisition prices were being pushed up past reasonable levels, requiring significant capital investment. Some companies were more intent on the number of companies that they had acquired, rather than integrating the acquired companies into the acquiring company. Others were acquiring companies without any apparent thought as to where they were located. Companies not located near any other company that has been acquired still have to be managed."


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