Superlative Season’s Greetings from the M&A Marketplace
It sounds like hyperbole, but it isn't: 2015 was the best year of the century for mergers and acquisitions among printing and packaging companies.
That leaves 85 years to go, and we can't say how long 2015 will hold onto the distinction. But, what we see in the near term is highly encouraging. It's especially good news for owners who are ready to act on their decisions to buy or to sell.
This week's decision by the Federal Reserve to let interest rates rise could have longer-term implications for the industry, and we'll address them in a moment. Heading into 2016, however, we are looking at an M&A marketplace with more buyers than sellers, rising EBIDTA multiples, and an infusion of cash from strongly motivated private equity investors—all the right ingredients for a continued run of opportune deals.
For buyers, there is no shortage of desirable acquisition targets. Now coming onto the market are well-managed businesses that weathered the recession without accumulating debt and with their costs firmly under control. Their owners see the present moment as the right time to sell either because they want to avoid another downturn or because they have other life goals that they now wish to pursue.
In either case, if they sell today, they probably will do so at EBITDA multiples that are half a point to a full point higher than what they would have been able to get a year ago. For qualified commercial printing firms, the range we are seeing is 4 to 4.5. Packaging businesses, always objects of interest to buyers, do even better at 5 to 6.5.
Helping to drive valuations up is a surge in acquisitions by private equity investors. With the exception of packaging, where these investors have always been active, private equity participation used to be a rarity in the printing industry. Now, however, investors using ready cash from pension funds and high net-worth individuals are looking seriously at printing firms, and not only as short-term plays. They represent a new category of opportunity for sellers, and we expect them to remain M&A market makers next year.
Because so many transactions are financed with borrowed money, the movement of interest rates is always a factor in M&A planning. Until the Fed's announcement this week, however, there had been no upward movement in them for more than nine years.
What has been announced is modest: a rise of 0.25-0.50 percent for now, with additional increases to be determined by the condition of the economy going forward. We agree with predictions that the impact of these increases will be limited. Interest rates will rise over the next several years, but not to the point where they will keep most printers from securing affordable long-term loans to buy new equipment or to fund M&As. (Short-term borrowing for lines of credit could become more difficult, though.)
Not to be overlooked is the other effect of the Fed's decision: the strengthening of the dollar as a consequence of higher interest rates. Here the connection is mainly for printers doing business with U.S. customers that export. As the value of the dollar goes up, their goods become more expensive to buy, potentially depressing sales. A decline in sales often brings a corresponding cut in marketing spend, including amounts earmarked for promotional printing.
But this scenario, if it does play out, is far from being just around the corner, and we don't see it as a cause for near-term concern. On the contrary: 2016, like the year before it, should be a most propitious time for buying and selling printing and packaging companies. If you have been on the fence about proceeding with a deal of your own, bear in mind that while M&A market conditions are better than they have been in years, nobody knows how long they will last.
If you think the moment has come to discuss your options with a qualified M&A advisor, you probably are right. New Direction Partners sends all of its readers, clients and friends best wishes for happy holidays and a prosperous new year.
Frank D. Steenburgh, partner at New Direction Partners, brings over 45 years of industry experience, including the past 30 years in digital and is internationally recognized as an expert in digital printing and publishing. His experience includes corporate officer at Xerox and president of Indigo’s Americas operations. Frank’s value includes a wealth of global industry contacts, a proven track record in development and implementation of business strategies that drive revenue/profit growth and a deep understanding of horizontal and vertical markets. Contact him at (610) 230-0635, ext. 709.