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Consolidation--The Ties That Bind?

February 1999
Consolidators, independents discuss merits of selling the business to a roll-up company.


To sell or not to sell? A difficult question with no easy, or clear-cut, answers.

The last 15 years have been marked by considerable growth in the commercial printing industry. That growth has been bolstered by awe-inspiring advances in technology: computer-to-plate, offset press automation and digital prepress advances, which have all streamlined production processes and decreased turnaround time.

By building a better mousetrap, printers large and small have made their industry highly competitive. While the National Association of Printers and Lithographers projects industry growth in the 4 percent range for 1999, it is the larger, national printers that are accounting for a larger slice of the growth pie.

Not surprisingly, the printing industry is following a familiar path taken by other industries—the road to consolidation. Mobil and Exxon, America Online and Netscape, British Petroleum (BP) and Amoco, Chrysler and Daimler-Benz, and Citicorp and Traveler's—heavy hitters in their respective industries—are all banking on reaping the benefits of consolidation.

The concept of the small, mom-and-pop business owner unwantingly releasing control of his/her company to a cold, corporate entity is as outdated as it is inaccurate. No one is selling the "farm" to avoid foreclosure anymore, especially not businesses that generate $10 million or more in annual sales—the magic number for ideal acquisition candidates by most industry consolidators.

What consequences face the printing industry in light of consolidations? Will an entire segment of smaller to midsized printers be swallowed into a much larger machine? And will the landscape of commercial printing, its price structure and the manner in which business is conducted, be forever changed?

Respected industry veteran Ray Frick has worked on both sides of the issue. Frick is currently CEO, president, director and part-owner of Lehigh Press, a highly successful, independent printer celebrating its 75th anniversary this year. But for the previous four years, he was president and COO at Quebecor, where he helped lead the charge in acquiring Eagle, Sayres, Petty and American Signature.

Frick earlier served as president of the direct marketing group at Banta when the company acquired Danbury Printing. Prior to that, he toiled for R.R. Donnelley's book group. He began his career at DuPont, where he orchestrated the supply end of the graphic arts distribution program.

"There's no question that the trend toward consolidation in the graphic communications industry is rampant and will continue," Frick notes. "It's too linear to say that the consolidation trend will spell the end for midsize and small providers. I don't think that will be the case.

"There is a position in this food chain for midsize and smaller printing companies," he adds. "The printing industry has a high service component and has very substantial service requirements."

Successful printing companies, Frick believes, need to be able to dedicate themselves to individual customers, bringing about a strong relationship focus. The ability and will to tailor capital and human assets to specific customer requirements is key to a printing firm's success, regardless of its size.

Points to Consider
Frick feels the industry is still relatively fragmented and diverse, a trend he sees continuing, though diminishing, over the next 10 years. Consolidation also requires a post-acquisition, multi-faceted integration process—one that takes time and isn't always smooth. Integration, he points out, involves the imperative of successfully blending company cultures while allowing for earned autonomy. Important sales considerations include fostering cross-selling, fairly and harmoniously rethinking the mechanics of account assignments and sales compensation arrangements.

Relationships are most vital. "Customers in our industry still buy from individuals they trust and value," Frick says. "They don't exclusively buy from large companies that they may not always understand. Sometimes the major providers—in the minds of their customers—have trouble meeting customers' changing schedule requirements. Getting bumped from their place in a major printer's computerized schedule can be an issue for any customer. Middle-market providers and smaller companies sometimes achieve this focused flexibility and service fluency in a way that is more appealing to customers."

Then there are the companies that have turned acquisitions into an art form, and one of the most celebrated artists is Consolidated Graphics. Joe R. Davis, chairman and CEO of the 14-year-old company, gradually built his company one acquisition at a time, as well as through internal growth. At press time, Consolidated Graphics boasted 46 companies and four more that had signed letters of intent.

Like Frick, Davis believes there will be an ample market share for independently-owned printers. Both Davis and Chris Colville, Consolidated's executive vice president of mergers and acquisitions, contend that their acquired companies are operated in the same manner as independents.

"It's difficult to pass a business down generation after generation," Davis remarks. "Certainly there have been some successful third- and fourth-generation family businesses, but that's a difficult transition. Rather than pass the business on to children who may not have an interest in the business, owners have an option. They can take some or all of the net worth out of the business, reap some rewards and join a consolidator."

Most consolidators, like Consolidated Graphics, request that the former owner remain on board to run the company. Some owners are contracted to remain for a specific period, often five years.

Davis cites a more intensive, defined focus on growth, profitability and expansion for companies that join Consolidated's family of printers. Additionally, Consolidated is grooming young professionals for managerial positions.

"Consolidators are attracting new people into the industry, and that's a plus," Colville adds. "The ability of a New York Stock Exchange company to attract quality college graduates into the industry is helping to change the landscape."

Making the Case
In addition to enhanced purchasing power and reduced insurance rates, acquired companies have the benefit of selling the capabilities of their sister companies, as well as the ability to network with other executives. When a new system or technology becomes available, it can be purchased for one of the companies to see if it's a viable solution. Other members of the group could follow should the solution work.

"If it doesn't work, it's not a bet-the-company kind of proposition that we're stuck with for seven years while we make the payments," Davis notes.

One company trying to model itself after Consolidated Graphics is Nationwide Graphics. Formed in 1998, Chairman and CEO Carl Norton says his company seeks to purchase printers in the $5 million to $30 million range.

Both Norton and Jerry Hyde, vice chairman and executive vice president of the company, forecast a significant decrease in the number of smaller printers, but still believe there will always be a place for the most efficient producer.

"We speculate that sometime around five years from now, 50 percent of the graphic arts business will be controlled by five to seven major companies," Norton says.

Norton and Hyde see three valued reasons for joining a consolidator: 1) An exit for print shop owners ready to retire; 2) An avenue to grow as a printer, acquire some of the net worth and not assume the financial risk of investing in new equipment or technology; and 3) Become a one-stop shop, backed by the network of sister companies. Companies can broaden service offerings for graphics work, web printing, fulfillment, inventory management, to name a few, with the help of more resources.

"If you're a die-in-the-wool printer looking to expand into fulfillment, inventory management and database management, it's fairly intimidating and costly [to an independent]," Norton contends.

"The typical model of a printer is now changing to more of a company that handles the ultimate communications between a potential customer and a person who's making a pitch, as opposed to just doing one facet of it."

The Little Guys
For those who remain independent, Hyde believes smaller printers will need to find niches. As long as there are customers who value personalized service, there will be a need for smaller independents.

"The smaller guy down the street, who just needs printing, in the future will lean more likely toward a smaller printer who is very accessible," Norton says, "because he can call [the printer] at night, play golf with him, etc."

Printing Arts America is an example of a company created with consolidation in mind. According to President Terry Tevis, the primary goal of Printing Arts America (formed in 1998) was to build a platform of regional companies linked digitally into a national organization.

While Printing Arts America may be viewed as a new kid on the block, Tevis boasts more than 25 years' experience in the industry. His goal is to keep print competitive with other forms of media.

In a $70 billion industry that is fragmented—a fragmentation that makes it vulnerable in terms of the communications industry remaining competitive—Tevis feels print needs to be competitive from a speed, rather than just a cost, standpoint.

"We need to focus outside the confines of print and look at ways to compete with the Internet, with other major print companies and with any other form of digital information flow," Tevis says.

"By linking regional companies into a national print platform, we can drive cost out of the equation, bring new ways to look at speed in their print processes and bring a marketing discipline that views the customers' entire value chain. By focusing on speed, database management and the digital process, we will make the regional printer much more competitive with other electronic media.

"[For] the bottlenecks that many of these regional printers found in their press or prep areas, we were able to bring speed to the process and make the print medium more competitive."

Cunningham Graphics Int'l is another player in the consolidation game. Aside from the requisite acquisition of companies that broaden its product/service base, Cunningham Graphics also sought to flesh out its global distribution network.

Gordon Mays, executive vice president in charge of marketing and new business development for Cunningham Graphics, sees consolidation creating a corps of strong regional printers that cater to large corporate customers—customers who seek printers with a breadth of services. Single sourcing is the buzz word for those print buyers.

Mays also believes that those independents who have no plans to sell should prepare themselves for such an act.

"Smaller companies should be prepared for a sale, even if they're not going to sell," Mays argues. "Owners should take six months to a year, reduce extraneous expenses, hold off on equipment purchases and sell off underutilized assets.

"Even if they don't sell, this process maximizes profits and makes their firms healthier. Companies should take a hard look at their capital expenditures."

Even those whose livelihood rests on frequent M&A activity believe the smaller, independent printer is not likely to disappear any time soon. Harris DeWese, of Compass Capital Partners, a banking firm specializing in the printing industry that primarily represents sellers, believes they will endure. In 1998, Compass represented the selling shareholders of 20 printing companies to eight different industry consolidators.

By the Numbers
DeWese is currently studying the top 25 geographical markets for general commercial printing. He found that consolidator printing companies now own between 20 percent and 40 percent of the share in many markets, most notably Boston and the Baltimore/Washington, DC, corridor. In markets such as New York and Chicago, the consolidator foothold is weaker—less than a 5 percent share.

"Consolidation is a natural economic force in fragmented industries," DeWese says. "I like to think of it as 'Darwinian.' Basically, the printing markets are driving toward price equilibrium, a condition where neither the buyer nor seller has an advantage. Print buyers have had the advantage for a long time, and the efficiencies of consolidation lead to better margins and less customer control."

Having the advantage of being just "around the corner," DeWese feels the smaller independents will thrive through increased flexibility, responsiveness and better customer service. Complacency, on the other hand, is not a luxury these companies can enjoy.

"[Smaller independents] must sell well and compete hard, or they will suffer extreme price competition from the economies of scale associated with the consolidators' purchasing power," DeWese notes.

Compass Capital isn't alone in its consolidation brokering focus. Berenson Minella & Co. is another leading investment banking firm serving the printing and related industries. It acts as a financial advisor to companies in connection with mergers and acquisitions, as well as private financings.

Among its résume of advisory assignments are Judd's, Anderson Lithograph, American Signature, Graphic Arts Center, Perlmuter Printing, Jay Packaging, Infiniti Graphics, Nimbus CD International and George Rice & Sons.

Selling Environment
Gregg Feinstein, a partner at Berenson Minella, feels the selling environment is an attractive one due to the variety of suitors a seller can consider: large, public companies; public "roll-ups" or consolidators; private "roll-ups" or consolidators; and financial buyers. Each offer different things to a smaller printing company and need to be evaluated on a case-by-case basis, he says.

Feinstein believes consolidation affects the landscape of the industry in a number of ways, including the focus they place on profitability and shareholder returns in a more sophisticated way than was the case in the past.

"Up to a few years ago, we were surprised by the number of owners who made significant capital expenditures without a detailed analysis of whether it was generating value for their shareholders," Feinstein recalls. "Since selling is now such an accessible alternative, owners must do a more complete job of analyzing the return on expansion plans in order to judge whether they are being adequately compensated on a risk-adjusted basis, given the additional investment they must make or debt they must incur. This kind of analysis should, ultimately, help correct the seemingly constant overcapacity present in many segments of the business."

He adds that M&A activity has been beneficial for the industry on the whole for a number of reasons. The transactions have attracted large amounts of capital to the industry; public and private investors are interested and view the graphic arts industry as a platform for growth through acquisition.

Feinstein also believes the activity attracts additional quality senior managers to the business. It is easier to attract senior-level talent to any industry, he argues, when that industry is growing and presents an opportunity for enhanced growth and profitability through acquisitions.

Some of the most ardent independents have few qualms about the large "roll-up" companies. In fact, John Spenlinhauer, chairman and CEO of Spencer Press, feels his standalone company has benefitted from the merger and acquisition activity.

"Because of all the mergers, we're probably doing better," he says. "A lot of printing buyers don't want to be caught up with [consolidators] who are running multiple plants. The advantage that we have is that the owners are right here [at the plant]. It's much more of a personal relationship that you have with customers; they're not just one of the many. And there's a degree of stability in dealing with an independent."

Spenlinhauer points out that all negotiations, all aspects of conducting business, are tended to in-house, without the bureaucratic red tape of larger companies. This flexibility allows changes to be implemented seamlessly.

Not for Sale
Spenlinhauer admits that his company has been approached about selling to a consolidator. He feels it's not in the best interest of Spencer Press, which is currently enjoying expansion.

Some independents have accepted consolidators as an aspect of the business world. Ken Field, president of Continental Web Press, recalls hearing how hog farmers were being driven out by mega-hog producers because the price of pork had fallen to 15 cents per pound.

"I don't care what business you're in—mergers and acquisitions are a fact of life," he says. "As far as the printing industry goes, it has to happen. Especially in the face of new technology and with the rapid pace technology is changing. The amount of capital investment required to stay state-of-the-art is no small dollars.

"The larger printers in the industry, with their capital budgets and capital expenditures, are able to purchase those printers that cannot keep up with the costs to acquire the equipment needed for all facets of our industry, from prepress all the way to distribution," Field points out.

Still, don't expect Field to post a "For Sale" sign in front of his building any time soon. It has less to do with money and more to do with a way of life.

"I started at a young age: 24," he says. "We just celebrated our 25th anniversary. My two boys work here. It's fun to have my family working with me, and I'm simply enjoying myself."


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