M&A Activity -- Expect a Surge in Mergers
Small Printers Will Unite in Buying Groups or Roll-ups
Printing companies in the $500,000 to $10 million annual revenue range will either become targets for "franchise" type branding roll-ups or join and form huge buying groups. This new phenomenon will evolve as a Darwinian reaction to competitive pressures. This new form of consolidation, like the others, will be driven by the overall printing market's need to find equilibrium by equalizing supply and demand.
The end game is to match press capacity with the needs of print buyers to adjust price levels to obtain more desirable profit margins. Most capital expenditures during this era will be for faster, high-capacity equipment to replace older, slow, unproductive equipment. Mail-Well announced, in its recent quarterly earnings report, its intention to spend $25 million during 2004 mostly for new presses that can replace two older presses. This capex strategy, of course, reduces variable expense by eliminating factory labor.
Bankruptcies and Liquidations Will Be at Record Levels
In addition to the five previous M&A related initiatives, many reactionary and indecisive printing company owners will file for bankruptcy protection or liquidate—either voluntarily or involuntarily—at unprecedented rates. This type of consolidation permanently eliminates capacity and leaves lenders with devalued and unneeded collateral.
Expect to See Some Dramatic Consolidation Activity
I estimate that the 2004-2009 consolidation era will see more than $30 billion in aggregate print sales change hands. Buyers will pay more than $20 billion to acquire these revenues. Overall, I expect 3,000 to 5,000 printing companies to disappear and thus shrink approximately 30,000 press cylinders and about 15 percent of the jobs out of the market. This will occur despite overall print demand increasing at rates of 4 percent to 7 percent annually.
This kind of dynamic future raises many questions for printing company shareholders and managers.