WE CAN ALL LEARN FROM THE CURRENT M&A ENVIRONMENT
BY KATHERINE O’BRIEN
For the past year or so, high-profile mergers and acquisition (M&A) announcements have dominated the trade press headlines. Examples include R.R. Donnelley/Consolidated Graphics (October 2013), Mittera Group/Wisconsin Web Offset (November 2013), Harland Clarke /Valassis (December 2013), Imagine! Print Solutions/Classic Graphics (December 2013), Matthews International/Schawk (March 2014), and Quad/Brown Printing (April 2014).
While these are among the most prominent and largest transactions, the consultants we spoke with concurred that deals are happening among companies of virtually every size. In this article, we’ll provide some context for these moves as well as some practical advice.
A FRACTURED AND FRAGMENTED INDUSTRY
M&A activities reflect some realities that will come as no surprise to commercial printers: It’s a tough world out there. According to the NAPL, total commercial printing revenues have declined more than 20% from the all-time peak of approximately $100 billion in the year 2000. Projections for 2014 indicate that sales will increase between 0.5% and 1.5% from the current depressed level, essentially flat when allowing for inflation.
The NAPL further notes that the percentage of total industry commercial printing revenue derived from traditional offset printing has declined from 86% in the year 2000 to 61% in 2012. “The percentage from offset printing is projected to fall even further to around 54% of total revenues in the coming year,” observes Mark R. Hahn, NAPL Senior Vice President. “If a commercial printing company hopes to just stay even with its past, it must replace the sales once obtained by providing traditional offset printing with sales from new services. With that being said, we’re getting fewer phone calls from companies that are highly distressed and more from companies that are highly profitable and interested in buying or selling another company.”
Peter J. Schaefer, an advisor with New Directions, concurs that growth by acquisition is an easier proposition than achieving organic growth in the commercial print space. Hot markets—segments commanding high multiples—include:
- Digital books
- Direct mail/marketing
- Large format
- Retail POP
- Web to print
- Customer interfaces—proprietary technology
“We are absolutely seeing large commercial printers interested in some of these specialized companies as a way to diversify,” says Schaefer. “In 2012, we sold a company called Meisel to Donnelley—it was an entre for Donnelley into point-of-purchase (POP). We’ve also seen commercial printers acquire data analytics companies as a means to transition from being a commodity printer to a communications company where they can control the data and build more customer loyalty.”
DIGITAL DELIVERY DIVERSIFICATION
Hahn stresses that diversification is more challenging than in days past. “The days of being a one-stop shop, adding a certain piece of equipment to open new doors—that model as a road to success is over. It’s a well-worn road. Offering something like wide format or digital printing is no longer unique.”
Delivering digital services may be a potential differentiator for some printers. Hahn cites Brown Printing’s 2013 acquisition of Nellymoser: “Here’s a traditional printing company buying a mobile interactive agency that delivers messages on mobile devices,” he says.
Nellymoser, a Boston-based mobile marketing and technology company, has deployed more than 800 print-to-digital campaigns for some leading magazines. As we go to press, Quad has announced it will acquire Brown.
GO, FLEXO, GO
Transcontinental recently embraced flexo packaging as a means to go beyond its traditional strengths as a magazine, newspaper and book printer. In March 2014, the company acquired Clinton, Montana–based Capri Packaging from parent Schreiber Foods, Inc.
Both Hahn and Schaefer report a lot of activity on the packaging front. “We’re seeing a roll-up in the packaging space that is not unlike what we saw in commercial printing in the mid to late 1990s,” says Hahn. “There’s a tremendous amount of activity, fueled in part by private equity firms. While shunning the commercial printing sector, in 2014, private equity funds will be active in all aspects of the packaging industry, including labels, folding cartons, and supplies and equipment geared to packaging.”
Even if you have no plans to sell your printing business, now is the time to get your financial house in order. Doing so is among the greatest gifts you can give to your family and employees. We never know what life will bring: death, divorce or perhaps even an unexpected offer from an interested buyer. Are you ready? You owe it to yourself and your business to understand current conditions as well as what creates value for your business and how that value is measured in the marketplace.
Get an independent valuation of your company from an industry expert, someone familiar with the printing industry, who understands multiples and the factors that go into valuation. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is among the key metrics for valuation purposes. Do everything you can to grow this number.
“If you have a three- to five-year window to spruce up your company before you put it on the market, whatever you can do that gives you better control over your revenues tends to increase the value of the EBITDA multiple you will receive when your company is ultimately sold,” says Sid Chadwick of Chadwick Consulting.
Know your options as a buyer and a seller. Not every company is a candidate for a strategic acquisition where the purchase price is based on a multiple of adjusted EBITDA. Another option is a “tuck-in,” where the buyer essentially folds the seller’s book of business into its existing operations. This typically involves paying a commission (generally 4 to 7%) on sales retained over two to four years.
Chadwick offers a caveat on tuck-in sales. If the seller is responsible for paying the company’s debts, the acquiring company should know the extent of its potential liabilities. “The seller may go to the creditors and say, ‘Fellas, we’re gonna come up short on this. One of you will get $.30 on the dollar, one will get $.20 on the dollar,’ and so on. Creditors have been known to go after the acquiring companies, and some have won in court.”
A cashless sale might also be in the cards—in this type of transaction, the purchasing firm gets sales and selected assets. And, rather than a royalty arrangement, the seller receives stock in the new entity.
DON’T DO IT
If you are on shaky ground, a pairing with a weak partner isn’t likely to succeed. As one consultant put it, when two sick companies get in the same bed, neither one gets well. Consider Ovation Graphics: “It was also the end of a long and winding road when this mini roll-up in Texas brought together the highly respected Branch-Smith Printing company and Motheral Printing,” Hahn observed in the January 2014 Target Report blog. “The two acquisitions in 2012 ended 100 years and 78 years of family ownership, respectively, of these two commercial printing firms. Whatever remains of Ovation Graphics has been handed over to the bankruptcy courts to manage in an involuntary Chapter 7 proceeding, instigated by five companies that got together as petitioning creditors.”
IT’S NOT A SPRINT
Finally, allow yourself plenty of time to sell your company—at minimum one to two years. “You’re better off liquidating and closing the doors than thinking you’re going to turn something around in two to three months,” says Rock LaManna of the LaManna Alliance. “Selling a business is a process that starts a long time before the deal occurs and finishes long after the closing.”