Economic Normalcy Will Come Back, and So Will Printing Industry M&A Activity
It’s almost hard to remember that just a few months ago, we were all looking at an industry where a brisk pace of mergers and acquisitions signaled that its economic health was good. Now, we’re peering at that picture through the dark lens of the COVID-19 pandemic — and, suddenly, everything looks different.
In this difficult time, printers and converters are naturally focused on doing whatever needs to be done to protect and care for their employees and their businesses. As a result, their priorities as business owners have changed. This obliges them, for the time being, to think more about short-term responses to the crisis than about the longer-term strategic plans they’ve made.
In the short term, we don’t know what will happen — the upheaval to the economy was too sudden, and we are still trying to measure the losses it is causing. We do know that, as the threat of the virus fades and the economy starts to rebound, M&A activity will rebound along with it.
That’s why we remain optimistic about M&A opportunities for owners of printing and packaging companies. We are in uncharted waters at present, and it’s likely that the closings of some deals will be paused — but not cancelled. We fully expect the interruption to be temporary, lasting only as long as it takes corporate, strategic, and financial buyers to review their options and get their plans back on track.
Even now, buyers and sellers we’re working with are committed to getting their deals done. Owners who have pressed the pause button can take meaningful steps to ease present financial pain and better position their businesses for the recovery to come.
Eventually, the worst of the crisis will have passed, and a favorable economic climate will return. Then, we foresee a resurgence of the strong M&A trends that were with us right up to the moment when the economy was put on hold by the health and safety measures the nation wisely put into effect.
People have asked us whether the economy will suffer as much damage as it did in the aftermath of the housing market collapse in 2008, the event that triggered the Great Recession. Our answer is that the present situation, while serious, is not the same kind of crisis as in that year, when the nation’s entire financial infrastructure took a body blow. This time, the fundamentals of the economy continue to be strong — a reassurance we didn’t have in 2008.
Rebound and Recovery
The current downturn is also impacting the printing and packaging industries in a different way, with some sectors hurting, but others still doing relatively well. We think this indicates that the national recovery, when it comes, could return the industry to full vigor in much less time than it took us to rebound from the shocks of 2008. The challenge now will be getting people back to work and jump-starting consumer spending, the force that drives so much of the volume for printing and packaging companies.
We’ve spoken a great deal over the past few years about something else we still have full confidence in: private equity (PE) investment in printing and packaging. Like the rest of us, PE investors are trying to understand what the next few months will bring. They may not be closing deals at the pace they were keeping before the virus hit, but they’re not closing deals in other industries right now, either. The PE money may temporarily be sitting on the sidelines, but it is not going elsewhere.
There’s no reason why it should. Interest rates for securing additional capital remain low, and the investors see as much potential in printing and packaging acquisitions as they ever did. The demand, in other words, is still there — it’s just temporarily pent up. We think that once it’s possible for PE investors to size up their opportunities with a little more clarity, they’ll be more than ready to resume going after them.
There’s no question that some companies in our industry will struggle during this time. That could lead to an increase of tuck-in opportunities in late 2020 and into 2021 as the hardest-hit companies seek a sensible exit strategy. Still, we don’t expect tuck-ins to be as broadly based as they were in the aftermath of 2008, with large numbers of distressed firms feeding a bargain-hunter’s market.
Steps for Owners to Take
Admittedly, it’s tough to valuate and price printing businesses just now. It’s also difficult for owners to plot their next moves when they don’t know what the immediate future has in store for them. But by following sound business practices and taking advantage of economic stimulus programs created by the federal government in response to COVID-19, owners can find the stability they need to pull through. Here’s what we recommend doing:
Husband cash to the extent possible by eliminating or postponing spending on discretionary items, such as marketing, meals and entertainment, subscriptions and dues, computer upgrades, and consulting fees. For business owners, cash is still king — and never more so than right now.
Access emergency financing, if needed, from the Small Business Administration (SBA) Economic Injury Disaster Loan Program (EIDL), now expanded to cover businesses impacted by COVID-19. Up to $2 million in working capital can be obtained at low rates and on favorable repayment terms. Those eligible for an EIDL loan also can apply to receive a $10,000 emergency grant through the end of this year, with no obligation to repay.
Protect jobs and cash flow by applying for a loan under the Paycheck Protection Program contained in the new Coronavirus Aid, Relief, and Economic Security (CARES) Act. This lets borrowers with fewer than 500 employees receive two and a half times their average monthly payroll cost to a maximum of $10 million. Most or all of the debt can be forgiven if the borrower maintains employment levels as per the rules of the program.
If staff reductions are unavoidable, rightsize responsibly by making sure that affected employees understand the scope of benefits available to them. The CARES Act adds $600 per week to unemployment insurance payments paid through July 31, 2020. It further grants up to 13 weeks of additional payment to those who have exhausted their benefits.
CARES also has a short-term compensation program based on reducing work hours instead of cutting jobs. Payments to employees under the program are meant to help them bridge the gap between their original compensation and what they receive with their hours reduced.
These are all interim measures. Our long-range advice in terms of M&As is to slow down the train, if necessary, but keep it on the rails. The opportunities that were down the tracks a few months ago are still there. Only the timetable has changed, and as we see it, not by all that much.
So, if you are in buying mode, hold onto that thought: we believe your moment to act is not far off. If you are an owner ready to sell, continue to prepare your business for sale. This isn’t a time to wave white flags or throw in towels. As unnerving as they may appear to be, present conditions simply don’t warrant that type of reaction.
A great way to keep things in perspective is to monitor the news and advice being presented at the Printing Impressions COVID-19 Resource Channel (piworld.com/extension/covid-19). At New Direction Partners, we are all standing by for whatever conversations owners would like to have about strategic next steps — or just about the state of things in general. Times are indeed strange, but a return to normalcy — the kind we all miss — is surely on the way.