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What's behind the urge to merge?

Nov 1, 1996 12:00 AM


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In the early 1980s, eagle-eyed industry observers may have noticed a trend in the making. Some industry pundits say it started when Graphic Industries (Atlanta), went public and bought W.E. Andrews, a New England printer. This trend has escalated over the years until what was once a daring business strategy is now a fact of life. Larger printing companies are growing through acquisitions, playing PacMan as they rapidly gobble up smaller firms.

This year, the phenomenon has even reached the stage at which two publicly owned companies are advertising for acquisition candidates. One is the same Graphic Industries that got the whole ball rolling, while the other is Consolidated Graphics (Houston), a company that began its buying spree this decade.

What's behind this buying and selling frenzy? In many cases, strategic positioning has encouraged larger national printers to extend their size and scope while simultaneously entering new niches. At the local level, the acquisition of a smaller company can transform a weak two-shift company into a strong three-shift operation. Also, printers with strong market share in one regional area can use an acquisition as a means of entering a new area.

From the seller's point of view, there are four drivers for divestiture: the question of succession, the increasing cost of technology, decreasing profit margins and favorable market conditions.

A decade ago, some founders nearing retirement age studied their options and concluded that selling their businesses was the best move. Generally, these were people who established their businesses after World War II. Now the succession question must be addressed by another generation of managers seeking an exit strategy - those who got their start in the 1970s.

One such printer, who asked to remain anonymous, claims the succession factor played a key role in his decision to sell. Although he'd enjoyed 20 years of growth, business was beginning to taper off and he was losing interest in managing his company. "My kids weren't interested in running the business, so when I received an offer I couldn't refuse, I took it," he confides.

The 1980s ushered in a more costly era for printing technology, something that certainly remains with us today. The need for capital has compelled many owners to seek the financial clout larger companies can provide. A perfect example is the recent sale of Mobility Inc., a $6 million printer, to Consolidated Graphics.

Established in 1969, Mobility has grown steadily over the years. Stephen Hutchins, Mobility's president and founder, claims his original goal was not to sell the company, but to continue to build on its strengths through strategic acquisitions. What prompted Hutchins to join Consolidated? He says it's the resources the larger operation offers.

"A strong public partner provides us with great strategic opportunities," he notes. "Now we're part of a family of companies with combined annual sales of $140 million with a very low debt-to-equity ratio. We're retaining our operating autonomy and local market focus, but we've got the economic efficiencies and purchasing power of a large company behind us."

Not many industry managers are willing to talk about another reason to sell: decreasing profit margins. As the industry continues to expand by adding more equipment, greater capacity is created. As competition for a limited amount of business grows fiercer, prices are lower and profits are slimmer. This holds true for both printers and vendors. Of course, if a firm is posting lower profit margins, owners can't be too choosy about their asking prices.

The final reason merger and acquisition activity is booming centers around buyers interested in growing through acquisition. In recent years, a number of graphics arts companies have gone public, selling shares in their operations to the public. Some have marked the funds generated through their public offering for purchasing smaller companies.

Will the strategy continue? Probably. The players will change, but companies will, by their nature, seek out suitable candidates for acquisition. A decade ago, one of the most prominent companies on the acquisition front was Maxwell Graphics, a firm that no longer exists. But they've been replaced by new players such as Graphic Industries, Consolidated Graphics, World Color, Big Flower and a host of other publicly held companies.

In the meantime, the circle will be unbroken. Entrepreneurs will continue to establish new printing companies, grow them and eventually sell them. Technology will continue to evolve and continue to put greater financial pressures on managers. Despite all of the shifting and sorting of owners, the industry as a whole will continue to operate along local, regional and national lines.

M. Richard Vinocur, contributing editor and president of Footprint Communications, a Fort Lee, NJ consulting firm for the printing and publishing industries