STATE OF THE INDUSTRY - Far from Dead
We believe that the consolidators' troubles have not been caused by fundamental problems in the industry, but by issues connected with integrating acquired businesses.
These are management issues, however, and similar to those in any consolidation play where large public company cultures are attempting to assimilate small, privately held, entrepreneurial cultures. There is almost always a performance lapse among the acquired companies while managers learn that public markets are now measuring them. This change in management philosophy never takes among some independent thinkers who now have fat bank accounts from the sale of their companies. In these cases, defections occur and even more time is required to bring the target company up to the buyer's expectation for performance.
Phase II Entered
If undisciplined "acquisitions for growth's sake" consolidation activity was Phase I, Consolidated Graphics, Mail-Well and Quebecor World have all taken direct action to move their corporate development activity into what we are calling "Phase II-Integration and Profitization." One new entrant, Kelmscott Communications, a San Francisco-based private company backed by J.P. Morgan, First Union and Duff Ackerman, is well into this "Phase II" and has embarked on its acquisition programs armed with well-defined integration plans. Kelmscott's pursuit of growth, guided and financed as it is by steely-eyed investors, speaks volumes about the future performance and the desirability of the commercial printing segment.
In reaction to Wall Street's rejection of their earlier business model, Consolidated and Mail-Well have responded with well-defined programs to improve internal growth. These endeavors are rooted in cross-selling to existing accounts, targeted national account development, aggressive sales management and strategic print job deployment for improved plant utilization. These companies are moving from acquisition-driven rollup cultures to customer-driven marketing cultures.
While we believe they will resume buying companies during the next 12-18 months, we also believe that as the sales initiatives are activated at the plant level, they will yield double-digit internal growth. The new internal growth coupled with renewed external growth should result in sales and earnings growth north of 25 percent. As they move into Phase II and 25 percent growth, their P/E multiples should move more toward 8.8 to 16.1.