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May 2001

There was a time, not too long ago, that you could not pick up a graphic arts publication without going blind by the number of news items focused on Company A acquiring Company B, or Company C buying up the assets of Company D. Then along came the current state of the economy. Wall Street's time of living high on the hog appears to be over—at least for now.

Today, you can hardly open a newspaper or watch the evening news without seeing Alan Greenspan, chairman of the Federal Reserve Board, ready to drop interest rates yet again to try to put a spark in the belly of the economy. While we all hold our collective breath—waiting for stocks to rebound—the printing industry's M&A game has slowly ground to a halt.

Due to these economic and industry-specific trends, it seems to be a good time to check in with four of the biggest names in the consolidation arena: Carl Norton, chairman and CEO of Nationwide Graphics; Ron Jensen, president and CEO of Kelmscott Communications; Paul Reilly, the newly named president and CEO of Mail-Well; and Joe Davis, chairman and CEO of Consolidated Graphics, to get their take on the state of the industry.

PI: Nobody seems to be making acquisitions right now. Why has the printing industry consolidation front become so quiet?

Norton: I believe that the consolidation front is quiet because (a) there's been a slowdown in the printing industry, (b) there's a possibility of a recession in the U.S., (c) consolidations have fallen out of favor on Wall Street and with other financing sources, (d) interest rates have been relatively high for the last year or so, and (e) sellers of printing companies still remember and think that their companies are worth the EBITDA numbers that were discussed during boom times. Earnings disappointments announced by the major, publicly owned printing consolidators also concern venture capitalists and other financing sources.

Jensen: Two factors have drastically reduced acquisition activity. First, public company valuations, although recovering, are still lower than what is needed to stimulate significant acquisition activity. Second, the debt markets are severely restricted in the current economic environment. This pertains to both cost and availability. This is true even for quality companies with strong financial ratios.

Reilly: The major driver and the major reason it has come down is because the multiples of cash flow that public companies and consolidators have been trading at have come down significantly. For them, the consolidators, to be providing their shareholders with returns, they need to be purchasing companies below that. Few printers want to be purchased at those levels.

Davis: Starting in the fall of 1999, the printing business lightened up from a sales and profitability standpoint. Because of that, stocks of many printing companies, including our own, suffered. Wall Street is not as enamored with printing companies as it once was.

However, prices for individual, private printing companies have gone up pretty high. As those prices for private companies are coming down, and I believe they are coming down today, we will see more acquisition activity than we have seen over the past 18 months.

PI: When can we expect to see M&A activity pick up again and what will give it a kick-start?

Norton: I believe that consolidation activity will pick up when there is an improvement in some of the issues I set forth earlier.

Jensen: Although a few cash-rich companies may initiate some level of acquisition activity, we believe it will be the end of the third quarter, at the earliest, before we see some normalcy in the markets. We do not, however, believe we will see a return to 1999 levels for quite some time, if at all.

Reilly: We should start to see some improvement in the valuation of printing companies after the slowdown in printing that is affected by the recession ends. Then, we'll see some improvement in the valuation of printing stocks.

Davis: For us or another company to begin making printing company acquisitions, it has to be an attractive investment—a good use of our money. With the prices coming down on individual printing companies, we will probably be making some acquisitions in the next three, six, 12, or 18 months.

PI: Does the current condition of the economy make shareholders weary of consolidation moves right now?

Norton: The current uncertainty in the economy should concern every business person, including consolidators and their shareholders.

Jensen: Shareholders are always looking for an economic opportunity, regardless of the state of the economy. To the extent a consolidation makes economic sense, and assuming the availability of equity and debt financing, consolidation will continue at some level.

Reilly: I think there is little doubt about that. In an economic downturn there is always a very viable request by shareholders to be husbanding cash more than they would during growth periods. It is a very natural reaction in this environment.

Davis: I think the condition of the economy concerns everybody. I am more worried about running a company, what impact the economy is going to have on our company today and the impact it will have on any company that we are acquiring. Certainly the economy is a concern to all of us.

PI: How are you integrating the companies that you have already acquired?

Norton: Nationwide is integrating the companies it acquired in the past by standardizing their accounting charts of accounts, installing costing systems that are compatible, standardizing personnel policies and manuals, and having various division presidents visit some of the weaker divisions for the implementation of best practices.

Jensen: Kelmscott considers itself an "operating company" that happens to be acquisitive. Our company was founded on a customer-centric philosophy, meaning we have built the company around customer service, as opposed to "buying what was available." Each acquisition has been strategic and has satisfied a regional or national customer service objective.

We have integrated each acquisition such that we enhance the individual company's performance while leveraging its effect on the entire system of Kelmscott companies. The net effect is that we are building customer relationships across a broad spectrum of services. We believe this is what is required to build a successful and lasting communications business.

Reilly: The current condition gives us some more time to do that (integrate previously acquired companies). Much of the focus of Mail-Well in the past six months has been to work on integrating these companies and to improve our capabilities to compete as one.

Davis: One of our strengths is that we don't change the companies. We buy good companies; we like to keep the management in place and we attempt to improve those companies. We don't make wholesale integration changes to the companies we acquire. That is one of the reasons for our success. We certainly make available to our companies our economies of scale, our management development program and we recruit at the college campus level.

We make these types of services available to the individual companies. We don't go in and change the individual companies. One of the things that we're doing today—since the slow down in acquisitions gave us some breathing room to do this—we are very aggressively developing some national accounts for our companies. A lot of companies now want to consolidate their purchasing. We offer the best chance to do that.


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