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Mergers and Acquisitions — When Sweet Turns to Sour

April 2008 By Erik Cagle
Senior Editor
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JUST WHEN it appeared that merger and acquisition activity was beginning to garner steam in the printing industry, along came a downturn in the economy. Is it a recession? Ask again about six months from now. Most economist pundits feel we’re heading in that direction or at least may start suffering stagflation—slow growth, high unemployment and fast-rising prices.

At any rate, the writing is on the wall, enough so that President Bush rushed through a $170 billion economic stimulus package in February, and Federal Reserve Chairman Ben Bernanke continues to cut interest rates to help stave off a recession.

For the sake of discussion, let’s assume we’re heading into what will be widely hailed as a recession. As printers, concerns revolve around the obvious—materials prices, the cost to produce goods, the cost to deliver said goods and the ability to pass resulting increases through to customers. Also, from the it-goes-without-saying department, printer fortunes are pinned to their customers’ ability to remain relatively recession-proof.

On the M&A front, however, the impact of a recession—even with the benefit of using past models—is uncertain and won’t be seen for several quarters. A lion’s share of deals that are hammered out in the front end of 2008 trace their genesis to the period before the recessionary kettle began to whistle.

“Our M&A blueprint has not changed, but current choppy market conditions will have an impact on when we ‘break ground’ on our next acquisition,” notes Jim Andersen, president and CEO of Chanhassen, MN-based IWCO Direct, whose primary business—direct mail printing—is as recession-proof as any in the industry.

“(In a weak economy) the bar for moving ahead with a merger or acquisition is set higher,” Andersen says. “Existing customer relationships must be closely examined to identify needs and long- and short-term viability. Any acquisition will likely be focused on adding value and talent to our current integrated manufacturing and marketing services platform rather than simply expanding existing capacity.”

As the economic picture turns bleaker, Andersen feels it becomes even more imperative for all parties to perform thorough due diligence. He anticipates a resurgence of strategic buyers, “like public companies that need to defend market share and gain competitive advantage in a soft economy.”

Keeping It in Perspective

When assessing economic conditions, it is important to maintain perspective. Harris DeWese, chairman and CEO of Compass Capital Partners in Exton, PA, who has advised more than 140 printing company transactions, notes that even in recessionary periods, reductions experienced are comparatively modest. Private equity money has not dried up by any stretch; DeWese fields calls from equity firms on a daily basis.

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