Insiders Still Foresee Upbeat Days Ahead for M&A Deals
Call it maturing, call it contracting, call it whatever fairly and accurately describes an industry that isn’t what it was at its peak — but don’t make the mistake of writing off the printing industry as undynamic.
The place to look for the dynamism is in the churn of its ongoing mergers and acquisitions (M&As), a phenomenon driven by the energy of an industry remaking itself. Individually, M&As transfer companies or their selected assets from one owner to another. Collectively, they remold the industry to new market realities and rebalance its capacity to meet changing patterns of demand.
In the process, some firms nearing the ends of their life cycles vanish — the inevitable outcome of consolidation in any business sector. But, when they’re structured and carried out correctly, M&As reward sellers and buyers alike. The industry, meanwhile, becomes that much more solidly grounded for the future, one well-executed transaction at a time.
Experts who track and manage printing industry M&A transactions agree that the forces now behind them are likely to remain in place, continuing to pair buyers pursuing growth with sellers seeking an exit strategy.
Consolidation Is a Constant Dynamic
“The industry is always in a consolidation phase,” says Dr. Ronnie Davis, senior VP and chief economist, Center for Print Economics and Management, Printing Industries of America (PIA). He notes that the trend persists both in good economic times, when buyers have more money to spend, and in downturns, when “sellers get desperate” for deals to bail them out.
According to economic census data cited by Davis, the industry presently consists of about 25,000 print manufacturing plants and 16,000 firms supplying print-related media. Given that six out of 10 printing firms are family-owned, Davis says, there’s a general appreciation of the financial support that selling a business for cash — or buying one to create “permanence” for family members — can provide.
“Now is a great time to be a seller, and a good one to be a buyer,” declares Peter Schaefer, partner at New Direction Partners, an investment banking firm that brokers M&A transactions in printing and packaging. With organic growth hard to come by for many firms, he points out, growth by acquisition is the natural strategic alternative — and a ripe opportunity for owners thinking about cashing out.
But timing, while important to get right, isn’t necessarily everything.
Mark Hahn, managing director of Graphic Arts Advisors, chronicles printing industry M&As in his monthly bulletin, “The Target Report.” As consultants and advisors exclusively serving the printing industry and related sectors, he and his partners also bring buyers and sellers together in M&A transactions.
Hahn says he has found that “selling a company is a life decision for most people:” a step influenced less by investment considerations or the economic climate than by personal events — such as an illness or a spouse’s desire for a different quality of life — that trigger change.
The biggest M&A deals, however, happen for strategic reasons and, recently, M&A activity in the industry’s upper echelons has been brisk (see sidebar on page 28). But, the dealmaking pace isn’t what it was during the M&A surge of the late 1990s to early 2000s, and it isn’t likely to hit that flat-out stride again.
M&A Market: Neither ‘Frothy’ nor ‘Frenetic’
This is because consolidation has thinned the ranks of eligible players. “There isn’t the supply of companies that there were back then,” according to Paul Reilly, partner at New Direction Partners, and a former CEO of Cenveo, one of the busiest consolidators at the time. “Far fewer independents are left either as sellers or as buyers.” He says that although private equity investors have helped to reboot M&A activity with their newfound interest in printing companies, the action won’t be as “frothy” as it was formerly.
Financing is another limiting factor, according to Hahn, who identifies publicly traded stock as the “currency” that fueled growth in the boom times for M&As in the commercial printing segment. Now buyers have to rely on internally generated cash, bank debt, asset-based loans, and private equity capital to fund their acquisitions. As a result, says Hahn, “the pace is just not as frenetic as it used to be.”
Reilly notes that while M&As may have made some companies bigger in size, simply being bigger did not always translate into a business advantage. Nevertheless, he says, “the benefits of consolidation have not gone away,” and critical mass still represents a competitive edge for companies that possess it in their marketplaces.
As Hahn observes, the print market isn’t monolithic, and the nature of M&A activity within it varies by segment. He believes commercial printing will see a steady drumbeat of consolidation over the next several years as baby-boom generation owners sell their way toward retirement.
Hahn adds that replacing old press iron with high-speed, fast-makeready presses will accelerate the trend by making it possible to get the same volume of printing done with fewer machines — thus shrinking the overall number of companies needed to produce the work.
Hahn sees the same issues driving consolidation in the highly fragmented packaging segment, notwithstanding the fact that demand for packaging products remains strong. He also foresees consolidation among wide-format providers as the technology matures and as more commercial printing plants try to compete in the market by installing their own wide-format devices.
An M&A takes shape when the owner of one printing company likes what he or she sees in another printing company. Not surprisingly, the market segment the target company occupies, and the types of products it offers, will have a lot to do with how attractive an acquisition it represents.
In general, Schaefer says, companies that New Direction Partners calls “the haves” — those firms that have made forward-looking investments in technology — are the most desirable. Also marketable are firms offering Web-to-print services, direct mail, POP, retail graphics, and, as Schaefer puts it, “anything digital.”
As for the appeal that packaging companies hold for buyers, this segment “is so hot, you could almost get your fingers burned when you touch it,” Schaefer points out. Glowing “white hot” within it is flexible packaging, with suppliers of folding cartons, corrugated cartons, and pharmaceutical packaging generating M&A heat of their own.
Wanted: Profitability, Wide Range of Clients
Always desirable to buyers, according to Hahn, are highly profitable companies that don’t have issues such as account concentration, which can spell risk for the acquirer. Davis says that because PIA member companies — especially its high-margin “profit leaders” — tend to be “financially more viable” than the average print firm, they are both stronger as buyers and more attractive as sellers.
On the flip side are printing companies that either don’t have anything out of the ordinary to recommend them for acquisition or signal business shortcomings that put buyers off. Lack of organic growth, declining margins, failure to specialize, and labor issues earmark the “have nots” from an M&A perspective, Reilly says.
Job Shops Struggle for Work
In the weakest position, according to Hahn, are “sellers who don’t know what they’re doing next Wednesday:” owners whose shops complete a job and wait for the next one to arrive without being entirely sure where the work is coming from. Hahn says buyers will bypass companies like these in favor of businesses that demonstrate that they know how to plan and execute strategically.
But, with the M&A climate as positive as it currently is, there’s hope for companies in tough circumstances as well as for those in rosy ones. Reilly and Schaefer say, for example, that the best exit route for less desirable firms often is a tuck-in. In a transaction structured this way, the buyer absorbs the seller’s active accounts without also acquiring plant, equipment, and personnel (although the specifics can vary). Compensation to the seller often is a sales-based payout over time rather than cash at closing (with exceptions that can include cash for the seller when the deal is finalized).
Hahn, a former print business owner, also sees tuck-ins as a solution for “companies that are treading water.” He maintains that even highly distressed companies can find a path to sale as long as the downsides they’re dealing with represent “baggage that can be properly shed.”
A would-be seller’s first question probably will be about price — a question that can be settled by aligning the seller’s perception of the company’s value with the market’s.
According to Hahn, print company owners who understand today’s valuation criteria are usually satisfied with what they get by the end of the sales process. Reilly similarly thinks that expectations have been “tempered” by market conditions and that sellers with a realistic outlook will be content to close reasonable deals and move on.
Quest for Capital to Fund M&A Deals
On the buyer’s side, financing an acquisition will take effort, but for qualified borrowers, raising capital to fund M&A transactions shouldn’t be unduly difficult.
Banks, says Schaefer, have been willing lately to lend amounts up to three times the EBITDA (earnings before interest, taxes, depreciation, and amortization) of the company to be acquired. Bankers, advises Hahn, tend to focus more on the value of hard assets than on goodwill (the value of the intangible assets arising from the acquisition).
M&A capital also may be available from private equity (PE) investors, which can range from global M&A dealmakers such as Platinum Equity, to “family offices” managing the resources of wealthy individuals. Increasingly, these businesses are stepping into the acquirer’s role themselves as they identify opportunities for investment in print manufacturing.
Right now, according to Hahn, PE investors “are very active in packaging, and reasonably active in printing.” They are focused, he says, less on “financial engineering” — buying and quickly reselling for profit — than on building platforms of acquired companies and “bolting on” additional businesses that fit a longer-term model of efficient expansion.
Pulling the Trigger ... If Not Now, When?
There is reason to think, says PIA’s Davis, that it would be hard to improve upon the present moment as the right time to buy or sell a printing business.
He explains that while the outlook may have been bleak 10 to 15 years ago, “the digital substitution is behind us now,” and the industry’s general health is good. The fact that the current economic recovery is now the longest on record since World War II is more good news for the industry, given that printing always does best in the mature stages of recoveries.
This is a strong argument for seizing the opportunity, according to Schaefer, particularly for sellers. “We often hear owners tell us, ‘next year will be a great year’ even though they are having a great year now,” he says. The risk is always that the economic picture and the M&A climate could change, diminishing the advantages that sellers now possess.
Selling owners should remember, Schaefer counsels, that “buyers always want to buy on an upward trajectory” and that there’s no way to know how much longer the industry will be trending in that direction.
“Make your company better,” Reilly urges prospective sellers. Don’t wait “for that next big account” to make the company more profitable, because adding volume just for volume’s sake may not necessarily accomplish that.
His corresponding advice to buyers is to be certain that there’s a clear strategic benefit in the acquisition. “Don’t swap dollars for dollars,” Reilly says, explaining that mergers which produce synergies and operating cost reductions are the ones that create real value.
Culture Is Critical for Selling Owners
In Hahn’s view, a three-part hierarchy of decision-making
prevails among most sellers: at the top, price; then, market segment and the type of work produced; and, finally, the culture of the acquiring company. However, he believes that selling owners should “think inverted” by putting culture first.
“The most important thing to think about is the culture,” Hahn stresses. Questions to ask include, will the seller’s employees and family members be comfortable in the new environment? Will the seller be at ease in the relationship if he or she has agreed to receive compensation in the form of a payout over time?
Hahn’s advice to buyers also prioritizes the human aspect of M&As. “Be willing to pay a little more,” he advises them, “if the seller’s company culture is a great fit and the product and production mix fits your company.”