Reilly/Schaefer | on M&A Directions: When It’s Good, It’s Quite Good
After what often has felt like an eternity of offering advice about mergers and acquisitions (M&As) in slow times, it’s a pleasure to report that the dealmaking environment is much more vigorous than it used to be. Since last year, we’ve been seeing discernible increases in both activity and pricing—trends that every owner should factor into his or her plans for selling a business or acquiring another company.
Three forces are driving the uptick in M&As for printing and packaging companies. The first is the emergence of private equity investors with their eyes on the kinds of opportunities they believe the graphics industry is full of right now. These players are both national and regional firms looking to do business in or close to their own backyards. They’re well funded, well motivated, and well disposed towards printing and packaging firms that fit their investment parameters.
Something else we’ve seen trending upward are EBITDA multiples in the public markets with publicly-traded printing and packaging companies—reason number two for the resurgence of M&As. These increases tend to raise the ceiling for purchase prices and make the multiples of other (but by no means all) companies rise along with them.
Reason number three is the simple fact that the economy as a whole is doing better and that, as a result, we’re all more open to possibility in M&As. The stock market is up, interest rates remain at record lows and investment capital is affordable. Compared with 12 months ago, there’s less panic in the general commercial printing segment and more confidence within the packaging sector. Commercial printers finally are seeing a rebound in profits on relatively stable sales. For packagers, there hasn’t been as much change, but that’s the good news—companies in this end of the industry remain highly attractive as acquisition targets.
Seeking Specialists in Growth Areas
More desirable than ever are companies in segments that attract not only equity investors, but other printing businesses that see these niche providers as on-ramps to market entry. Buying the expertise and resources of a company that specializes in wide-format output, labels, digital printing or inkjet book production often is a better way to break in than developing the capability internally. The high selling multiples of businesses like these reflect their appeal.
This doesn’t mean that general commercial printing businesses aren’t also getting some bounce from the reenergized market cycle we find ourselves in. Commercial firms often are sold in tuck-ins, a type of transaction in which the seller receives a payout over time based on future performance. As panic in this part of industry has abated, so has the rush to do tuck-ins—creating a shortage of tuck-in opportunities that benefits sellers who are ready to commit to them now. In fact, some of the royalty rates and payout timeframes we’re currently seeing are so good that we’d have called them crazy just a year ago.
We still counsel a need for realism about EBITDA multiples and pricing, however. Even with their recent improvement, EBITDA multiples still aren’t what they were in the high-flying days of the late 1990s. And, as always, the highest multiples and the best selling prices belong to growing, well managed, profitable business with good critical mass—company size relative to the competition—in their segments. Smaller, less profitable firms will not fare as well, especially if they are generalists.
Another thing that hasn’t changed in the advice we offer our clients is the absolute necessity of correctly timing M&A strategy to market conditions. In 2000, ahead of the market contraction that was taking shape then, we would say to people, “Sell before the train leaves the station.” We’re still saying it today even though we don’t foresee any abrupt change in the favorable conditions we’re enjoying at the moment.
Why? Because M&A transactions take time to build and, in that time, many things can happen. A deal that begins today with an overture to a buyer or a seller may not be complete until a year from now—something to think about for owners who want to sell but have no immediate plans to move forward. Market cycles don’t last, and those who sit on the sidelines risk seeing the best advantages of the good ones pass them by.
Get Your Financial House in Order
At New Direction Partners, our position always has been that regardless of the state of the market, M&A preparation should be an element of every printing company’s strategic plan. While present conditions can work in favor of both buyers and sellers, there’s no denying that a seller’s market has emerged and that owners with companies to sell have an exceptional opportunity.
This means that the time has come to put the financial house in order for scrutiny by potential buyers and their M&A advisors. We tell our selling clients that there are five important steps they can take to increase the value of their companies before a buyer appears:
- Get your EBITDA up. An M&A professional can show you how.
- Demonstrate your ability to grow your top line by increasing sales and share-of-customer.
- Reduce your interest-bearing debt so that you keep more of the gross proceeds.
- Try to time the sale process so that it occurs midway between major technology investments and during periods of positive sales and earnings momentum.
- Don’t try to DIY—hire an investment banker. M&A financing can be highly complex. Study after study shows that sellers who hire bankers get higher prices.
Two clients of ours who followed this advice are a packaging firm and a specialty printer whose sales we helped to close earlier this year. Both were purchased by private equity investors at very attractive multiples—numbers that we probably wouldn’t have seen if the deals had been done a year ago.
As we said, it’s refreshing to be able to talk about M&As in the context of market expansion after a prolonged spell in contraction mode. How long the good times will stay good, no one can predict. But, it’s easier to foresee success for owners who understand that they will never have a better moment than the present one to seize the M&A opportunities that finally have come their way. PI
About the Authors
Paul Reilly and Peter Schaefer are partners in New Direction Partners (NDP), the leading provider of advisory services for printing and packaging firms seeking growth and opportunity through mergers and acquisitions. NDP assists its clients by giving them expert guidance and peace of mind at every stage of the process of buying or selling a printing or packaging company. Services include representing selling shareholders; acquisition searches; valuation; capital formation and financing; and strategic planning. NDP’s partners have participated in more than 300 mergers and acquisitions since 1979. Collectively they possess over 200 years of industry experience with transactions in aggregate exceeding $2 billion. For information, e-mail email@example.com
Peter Schaefer, partner at New Direction Partners, is an experienced dealmaker with more than 25 years of investment banking and valuation experience, 20 of which has been focused exclusively on the printing and packaging industries. He has closed more than one hundred transactions in virtually every segment of the printing and packaging industries. In addition, he has performed hundreds of valuations for ESOPs, estate and gift tax planning and strategic planning purposes. Contact him at (610) 230-0635, ext. 701.