With Our 'Complements'
In the first part of this discussion about what motivates owners of print and packaging companies in transacting mergers and acquisitions, we noted that every buyer and seller needs to have a clearly defined “why” in mind whether a deal is on the horizon or not. Now, let’s address what drives the thinking of buyers who are actively pursuing acquisitions. What, in their view, makes another company an "ideal" candidate for an offer to buy?
Most basically, acquisition-minded firms are looking for ways to regain ground they lost in the tough years of recession after 2008. Some may be trying to build up their intellectual capital (internal talent) or solve problems of succession. But the advantage that every buyer hopes to gain is complementarity. This is achieved by acquiring a set of production capabilities and market penetrations that don’t significantly overlap with the buyer’s. It creates a greater-than-the-sum-of-the-parts relationship that enables both parties to combine their strengths in the most efficient and profitable way.
Complementary acquisitions diversify—and in the print and packaging industries today, diversification is a must-have ingredient for survival and growth. In my hometown, a printer in business for over 30 years has spent the last five of them acquiring companies with capabilities his firm didn’t have. He’s doing well, and his salespeople are confident in the knowledge that the plant can now produce almost anything they can quote—a competitive edge they didn’t have only a few short years ago.
In M&As where the parties are similar in size, profile, and geographic market, the buyer typically doesn’t retain 100 percent of the sales revenue of the acquired company. But, when the absorption of a $5 million company by a $10 million company brings new, non-overlapping elements and capabilities into the picture, the result could be a firm that is soon able to generate $17 or $18 million in revenue. That’s the value-adding power of complementarity at work.
Having identified a complementary candidate with the help of a qualified M&A advisor, the buyer then can run through a checklist of positive attributes for the acquisition—characteristics that the seller should possess if the deal is to close successfully. These factors can be investigated in a series of questions:
What are we buying?
Buyers prefer sellers with identifiable, defensible specialties: for example, digital printing, large-format output, Web-to-print, data analytics, logistics, creative services, fulfillment, etc. ("Defensible" means that the specialties are either rare or not provided by other printers in the seller’s market territory.) All activities should be taking place in clean, well-maintained facilities with efficient manufacturing throughput.
What kind of financial shape is the seller in?
Audited or reviewed financial statements should show that the candidate has ongoing revenue growth and sustained EBITDA (earnings before interest, taxes, depreciation and amortization) of 10 percent or higher. Value-added (sale value of jobs minus all materials and external costs) in the 60 percent-plus range indicates that the seller is doing an excellent job of controlling outside expense.
Is the capacity outlook favorable?
Anticipating new, incremental volume as an outcome of the deal, the buyer will want to be sure that the seller can handle it when it comes. Excess equipment capacity of 25 percent to 35 percent means that machine time will be available. There will be room for more equipment, work in process, storage space, etc., as needed in a plant with ample additional facility capacity. A plant that isn’t landlocked will have extra ground on which to build a wing for new equipment or whatever else may require expanding the building’s present footprint.
What do we know about management and employees?
Most buyers want the deal to include a competent, youthful management team who are willing to stay. The same applies to the workforce: turnover should be low, attitudes should be positive, and loyalty should be solid. As for sales management, most buyers are very leery if any one account or salesperson represents more than 20 percent of the total volume—that’s concentration, and concentration can be dangerous.
Will there be surprises?
There shouldn’t be any if the seller isn’t facing significant pending litigation (e.g., employment-based lawsuits, environmental violations) or isn’t coming to the end of a market based, long-term lease. This is what the due diligence phase of the transaction is for: to identify and plan ahead for situations that could come back to haunt the combined operation later on.
Decision-making about M&As is never simple, but it can be mastered by breaking the opportunity down into parts and examining the pieces systematically. Next time, we’ll consider how buyers should confront negative attributes: adverse seller characteristics that say "proceed with caution," if at all.
About New Direction Partners
New Direction Partners (NDP) is the print and graphic communications industry’s leading provider of advisory services for firms seeking growth and opportunity through mergers and acquisitions. NDP assists its clients by giving them expert guidance and peace of mind at every stage of the process of buying or selling a printing company. Services include representing selling shareholders; acquisition searches; valuation; capital formation and financing; and strategic planning. NDP’s partners have participated in more than 300 mergers and acquisitions since 1979. Collectively they possess over 200 years of industry experience with transactions in aggregate exceeding $2 billion.
For information, e-mail info@newdirectionpartners.com.
