M&A Activity: The Invisible 'Tuck-in' Deals
Cronin expects more robust activity for the label, packaging and direct marketing services providers, as the market believes in the long-term potential of those segments. Generic print producers, meanwhile, will suffer as pricing pressures, extreme overcapacity, and union and pension obligations will make it harder to consummate a deal, he says.
Cronin notes that many of these owners do not grasp the rise and fall of their asset value, market conditions and industry perceptions. "Owners must move away from the 'build it and they will come' mentality and begin using resources to fund R&D efforts for new products and services," Cronin remarks. "Financing, a poor balance sheet, recent weak performances, older equipment and a lack of differentiators impacts a company's value and potential for a successful exit."
The M&A market can be one of feast or famine. Take Jim Cohen, executive vice president of mergers and acquisitions for Houston-based Consolidated Graphics (CGX), who characterizes the current state of industry transactions as "slow and ugly, with a smattering of attractive opportunities." Declining or recovering earnings, meager growth prospects, eroding gross margins and delayed capex moves are all continuing to cloud the M&A forecast.
"We will continue to see more of the same—distressed deals and smaller mergers of two drunks trying to prop each other up and a few healthy deals—for the next year," he says. "There will also be some healthy companies that will put their toes back in the water to test the M&A market. With each day that passes, owners will have more runway behind them that shows improved profitability from the recession dip, and this longer period of improving earnings will give buyers more confidence and make them more willing to make acquisitions."
There are other variables that could spark more transactions in the coming years. Cohen adds that some owners don't have confidence in the industry moving forward, while others cannot afford, or refuse to risk, investing in newer technologies like digital printing. It's a double-edged sword; he notes that the most attractive M&A candidates, the ones with the best cases to sell, are solutions providers that have already embraced newer technologies, made the necessary capex and kept their pricing up. Those still languishing in the same challenging verticals from 10 years ago will find it difficult to locate an enthusiastic buyer.