M&A Strategies -- Ultimate Survivor's GuideJanuary 2009 By Bob Cronin and Janice O'Driscoll
So, what do we need to have to become one of these resilient enterprises? We can learn much from the lessons of those “extreme” contests (aside from the gourmet insect cuisine) by examining what it takes to be the “Ultimate Survivor.”
But, before diving in, realize the tides do turn. For as long as you run your printing establishment, you will face low tides, high tides, no tides and everything in between. Building your life raft to withstand fluctuations is key to staying afloat. The economy will change. And while it does, you must continuously adapt and build your company for the future.
Surviving—and ultimately, thriving—requires you to deliver value to the marketplace, in terms of size, positioning, capabilities and service. These issues make mergers and acquisitions (M&A) more critical than ever. Cash-strapped printers are seeking safe havens. Small players are struggling against larger competitors. Tightening print budgets are requiring innovative solutions. Customers that were once rock-solid are now declaring bankruptcy.
Add to this...buyers continue to consolidate their print spends. Increasing raw material and postage costs are forcing clients to find suppliers with greater purchasing and distribution power. Conglomerate buying groups are expanding, adding competitive pressure. And, that’s not even considering the effects of the global economy.
Clearly, scale and scope are vital to your future success—regardless of your history, segments, verticals, customers, equipment...whatever you bring to the table. M&A is no longer a luxury for print royalty; it’s a tactic every company should explore to grow its business. In our extreme economy, the approach must be highly judicious, but is key to becoming the Ultimate Survivor.
To maximize your success, you must first optimize your cash flow. Survivors are mean and lean. Before making a bid on the next “fire sale” or planting your FSBO sign, get your shop into fighting shape. The economic meltdown has increased lender scrutiny, and most investment capital is on hold through year’s end. Yet, good financing options—and opportunities—will be available to those with solid cash flow.
Start by examining your monthly overhead. Take a look at your core needs—in people, resources, supplies, etc.—and remove what’s not absolutely essential. Do you have unused equipment that you could sell off? Are you overstocking raw materials? Are you providing free warehousing? Are there three (or more) people handling what two can do sufficiently? The economy gives you the opportunity to make tough decisions.
The second part of cash flow improvement is keeping new expenditures in check. If you need new, more automated equipment, so be it. But nice-to-have items—and their risk—should be avoided like the deep-sea angler. Ensure capital expenditures can bring your company fast, profitable returns. Would a digital output device make you more competitive than another 40? press? Could the purchase of new bindery equipment attract more customers than another press?
Once you’ve done what you can to optimize cash flow, you can start considering M&A. A merger can be attractive during tough times. This is especially true in the case of “vertical mergers,” where the two companies coming together collectively move up the value chain (for example, a digital printer merging with an integrated marketing firm, or a wide-format shop with an installation/finishing operation).
For both mergers and acquisitions, making a deal holds certain requirements. However, in bad times, poor decisions can sink your ship. Evaluation should thus be undertaken with vigor.
Don’t be lured by price—An unbelievably low price for a seemingly good property may indicate something’s amiss. Understand a potential acquisition’s full financial situation before making any commitments.
Examine the real value—Will an acquisition strengthen your competitive position? Will you realize purchasing, manufacturing or distribution synergies? Namely, will it drive cost savings or provide a greater selling proposition?
Conduct thorough due diligence—Examine your prospect with the attentiveness you would your own life preserver. Ask questions. Demand answers. Check for leaks. If management cannot provide needed information, move on.
Devise solid plans for the property—The theory that 1+1=3 happens only with a strategic plan that makes it so. Craft, refine and follow a plan that maximizes the company within your particular enterprise.
Assess your risks—It’s always wise to plan for the worst-case scenario. If an acquisition fails miserably, what does it do to your core business? Does it put your company, customers, image or future at risk? Be honest. Deals often have a way of looking more attractive than they are.
As you sort through these guidelines, consider: At your current juncture, financial situation, age... is it worth the risk? Even if you can make acquisitions does not necessarily mean you should. In our extreme economy, your patience and selectivity are essential components of your Survival Kit. If you believe you can make the “all-time best deal ever,” verify your assessment. Hire a consultant for an expert opinion. While the basics never change, the stakes do. A questionable acquisition now could cost you life and limb.
Rigorous deliberation is even more important for sellers. You have years, significant cash—perhaps your entire careers and retirement—invested in your businesses. Selling it can be difficult, but it can also be the best decision you’ve ever made. Consider:
What is your reason for selling? Are you retiring, diversifying your portfolio or looking for a financial partner? Your reason will help you in crafting your action plan.
Are your expectations realistic for today’s marketplace? Your business’ value is likely different from where it was a year ago. And there are many circling sharks looking to chomp up quick bargains. If you have a solid property, give it a fair shake by marketing it properly. Even if you have to adjust your sell price, there are options to remain invested and draw returns as business rebounds.
Have you positioned your company for future success? Buyers want to know there’s value in an acquisition beyond today. The more growth opportunities you’ve laid out for your company, the more valuable it will be to a prospective buyer.
What type of buyer is best suited for your business? Selling to a competitor, strategic investor or private equity firm each has its particular advantages and concessions.
Understand the tax consequences. Every type of transaction has taxation issues—even a family succession or an ESOP. Factor these into your sell price and plan accordingly.
You sell your business only once. Selling during the extreme economy can, indeed, be lucrative. Proceed with caution to ensure you get what’s right for your life’s work.
Graphic arts companies are amongst the most resilient businesses out there. We’ve weathered the conversion to digital files, the migration to CTP, the elimination of numerous jobs and processes, and a continual influx of industry-revolutionizing technologies. The extreme economy poses no greater threat than what we’ve tackled before. Printers will prevail, and the strong will prosper.
We may not know how much further our stocks will sink or how this will all play out in the marketplace. We do know, however, that the extreme economy will present numerous M&A opportunities. Those that use these guidelines can help position themselves to take advantage of the situation and emerge as the Ultimate Survivors. PI
About the Authors
Bob Cronin is managing partner of The Open Approach and has directed multiple M&A transactions. A partner and writer, Janice O’Driscoll creates the Offering Memoranda, business models and research studies. This article has been abridged from “M&A: The Ultimate Survivor’s Guide for the Extreme Economy,” developed by The Open Approach. For a complete copy, e-mail email@example.com.