‘Culture, Culture, Culture’: The Essence of Printing Industry M&A Deals
(Editor's note: This article was written, and the interviews were conducted, prior to the COVID-19 pandemic. Even so, the principals of what makes for successful M&A transaction and integration best practices still apply.)
When printing companies acquire and merge with other printing companies, the transactions can be complex, but they’re usually straightforward. Most of what they consist of can be expressed in concrete business terms that satisfy lawyers, lenders, and accountants.
The exception is the factor most crucial to the success of the deal: an intangible element that can’t be measured, but must be mastered if the acquisition is to create a whole greater than the sum of its parts.
This is the fit of company cultures, and in the three stories of mergers and acquisitions (M&As) shared here, the buyers were unanimous in identifying it as the linchpin of the entire exercise. A selling owner said the same thing (see fact box below), and an entrepreneur buying into the industry from outside also paid close attention to the human element in taking over management of the business she acquired.
“Culture, culture, culture,” emphasizes John Falconetti, chairman and CEO of Drummond, a Jacksonville, Fla.-based printing, mail, and fulfillment services provider that has completed acquisitions of eight companies in various places since 2010. For him, “shared core values” are paramount, and he insists on knowing they’re present in the sellers he deals with. “I, personally, weigh the character of the seller to a very great degree,” he says.
After a deal closes, advises Thomas Quartier, president and CFO of The QMC Group in Liverpool, N.Y., the most urgent and often the most difficult task is “changing the culture as soon as possible” if the seller’s and the buyer’s cultures need to be reconciled. Otherwise, he warns, “you set the tone for
Coequal with Finance
“It’s as big a job as putting the finance stack together,” agrees John Helline, CEO of BindTech in Nashville, Tenn. He points out that buyers, especially those executing their first acquisitions, need to focus on “the difficulty of folding in the cultures as much as anything else.”
Having learned how to do that, and much more, from repeated experience with M&As, the leaders of the three companies endorse growth by acquisition as the right strategy for printing businesses looking to expand in the industry as it stands now.
Quartier points out that organic growth — the kind generated internally by gaining new accounts or expanding sales to current customers — has been hard to come by for printing businesses in his region of central New York State.
In 2011, what was then Quartier Printing took a different path by acquiring a larger business, Cayuga Press of Cortland, in a reverse tuck-in (a transaction in which the seller absorbs the buyer’s operation into its own, instead of the other way around). With the acquisition of Midstate Printing in 2015, the structure of The QMC Group was complete.
Growth by acquisition for BindTech, a multi-state network of postpress service firms, has come about through “market dynamics as much as our own strategy.” In the postpress segment until now, Helline explains, “there’s been little to no consolidation, and it’s been needed.” A trend in that direction among smaller, independently owned firms has created M&A opportunities for BindTech, the most recent being its purchase of Roswell Bookbinding in Phoenix.
Growth from buying other companies has proven to be a winning formula for Drummond because “we are very disciplined and intentional about our acquisition strategy,” Falconetti says. He notes that “many uniquely structured transactions” have broadened the company’s footprint from its founding location in Jacksonville to additional facilities in Atlanta and Detroit. Some of the deals were tuck-ins, and others were sales as going concerns; each was, in Falconetti’s words, “purposeful and strategic.”
From Commodity to Value-Add
All growth is good, but in no strategically sound M&A transaction is growth for its own sake the sole objective. Anthony Manna, chairman of SIGNET LLC, the private equity investment firm that owns BindTech, looks at buying a company in the graphic arts industry as an opportunity to “take a commodity business and turn it into a true value-add” that offers a more comprehensive set of services to its customers.
This can be done in two ways, according to Manna, who founded SIGNET in 1995 and directed its first purchase of a bindery in 2001. One is to acquire the company as a “platform” and surround it with the assets of subsequently acquired companies that can augment and expand what it does. The other is to help the acquired business develop a capability it doesn’t already have: creating, in effect, “a start-up product within a company.”
Manna has an analogy for the criteria he applies to selecting companies that SIGNET can transform by either of these methods: “the track, the horse, and the jockey.” The track stands for the general business climate of the sector the company is in. The horse is the company itself, and the jockey embodies the individual and the management team in charge — the people whose attitudes and cultural compatibility are key to making the acquisition work.
“My big thing has always been the jockey,” Manna observes.
Quartier agrees that much depends on attitude, which he defines as “the willingness of both parties to make a deal and be reasonable, with no encumbrances that are hard to get over.” He counsels buyers to avoid wasting time, effort, and money by determining, at an early stage, that “both parties are really interested” in moving forward.
Vital as they are, attitude and culture aren’t the only reasons why graphics firms seek to merge with other graphics firms.
Falconetti says that potential acquisitions for Drummond “must create value for our existing clients” in ways that help them optimize its business processes. Helline notes that because personnel with good shop-floor skills in postpress are becoming increasingly hard to hire, “acquitalent” — buying another company primarily for its skilled workers — has become part of the growth strategy for BindTech.
‘The Last Thing I Need’
Acquirers are sensitive to red lights as well ... traits that aren’t conducive to M&A dealmaking. Among the things BindTech doesn’t want to see happen as the result of an acquisition, according to Helline, are overlapping manufacturing commitments at inopportune times.
He explains that because the cyclical nature of BindTech’s production is well-defined, “the last thing I need is more business in the high periods.” Nor is he interested in adding capacity in saddle-stitching, folding, and perfect binding, which BindTech regards as commodity processes in comparison to the mechanical, hardcover, and edition binding services in which it specializes.
When it comes to negative indicators, Falconetti is blunt. “The slightest hint of dishonesty, or lack of character or candor,” he declares, “is an immediate deal-breaker.” He holds in the same low esteem those who offer what he calls “socially acceptable excuses for lack of performance.” For example, blaming slumping sales on general industry conditions instead of finding and fixing the true cause. Drummond will flee from any hint of “an optional culture of accountability” in the companies it evaluates for acquisition, Falconetti says.
The due diligence phase of an M&A transaction, commencing after the acquirer presents the seller with a letter of intent to purchase, is where all of the facts and nuances surrounding the deal come to light.
Most important to establish in this process, notes Quartier, “is who are the customers, and who controls those customers — who actually controls the sale.” He also urges full transparency with lenders, noting that “if you have a bank that understands what’s going to happen when the companies merge, everything comes together very nicely.”
Look at the seller’s account concentration, the ratio of commoditized to non-commoditized sales, and “the depth of the management team, or the lack thereof,” advises Helline. He also mentions that while BindTech traditionally reviewed five years’ worth of financials from its acquisition targets, it now tends to focus on data from the trailing 12 months because the economics of the industry can change so rapidly.
“Understanding what the seller personally wants out of the transaction” is an essential takeaway of due diligence, Falconetti says. So are recognizing “what the key stakeholders see as their company’s values” and assessing what they have done to create “stability and growth possibilities for their client base.”
Now for the Hard Part
Assuming that all of these questions have been answered in due diligence, the deal can proceed to closing — but not to the final end of the effort it demands. Next comes what Helline views as “the toughest activity:” combining operations, aligning workforces, and harmonizing everyone’s ways of getting things done. He says this might mean deploying an integration team to the acquired business “for a week or a month” until the merger has gelled.
Falconetti says that Drummond has a highly detailed, 90-day integration plan that kicks in 30 days prior to closing, setting in motion an effort that could continue for up to a year. Throughout that time, the idea is to “plan and execute, live our culture, and overcommunicate.” Being generous with information is a good policy, he observes, given that “in a vacuum of communication, stakeholders can easily assume the worst.”
All of the sources say that more acquisitions could be on the horizon for their companies. As Quartier puts it, “You never know when something will complement your business. We’re constantly looking to grow our business and enhance what we offer our customers.”
Their advice to others wishing to take the growth-by-acquisition route is to proceed with equal measures of confidence and care. Falconetti, for example, counsels first-time acquirers to start small and concentrate on mastering the human aspects of absorbing another company and its personnel. After this, he says, “your acquisitions become a lot more scalable.”
But Falconetti adds, “whatever you do, don’t focus on short-term profit” as the rationale. Prioritize what the acquisition will do to create long-term value.
Helline recommends building an acquisition strategy by working backwards from customers’ needs and best interests, making certain that the deal will do nothing to disrupt them. “The numbers are relatively easy anymore,” he says. It’s execution that counts, and if that stumbles, “it can sink you fast.”
Emotional Preparation Needed
Realism and advance planning are what the sources advocate for printing company owners who want to prepare their businesses for sale to prospective buyers. “Be prepared with a plan to sell, and be prepared emotionally to sell,” Manna urges owners, before they reach the age when owners typically begin to think about selling. “Make sure that you are ready to do this, that your family is behind you, and that your investment committee is behind you.”
To make the business attractive to acquirers, “find a strong specialty and become the best at it, or one of the best,” Helline says. Understand, too, the effect on business valuation that aging equipment will have in plants that fail to modernize. “The value of your business is no longer in those assets,” Helline points out. “The value of your business is in what you can produce with those assets.”
Falconetti says sellers “must be realistic about the business” and understand that there is a difference between making a value-based sale and “liquidating a struggling asset.” If sellers are not realistic, he adds, “they’ll never successfully go to market.”
But, as organic growth becomes harder to achieve amidst a general decline in demand for printed products, realism is a sensible prescription for would-be buyers as well.
“Don’t be afraid to do it,” says Quartier, advising buyers who are sitting on the fence to predicate their strategic planning on what has happened in the past one to two years, not the past 10. “The industry is changing. If your business is not growing organically, you’re kidding yourself.”