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Tuck In, Luck Out: A Guide to an M&A Opportunity Built for Two

There’s strength in numbers, goes the old adage, but there’s also strength in the power of one—a cumulative strength that printing companies can achieve by undertaking the kind of merger known as a “tuck-in.”

By Patrick Henry
Published: November 19, 2009

There’s strength in numbers, goes the old adage, but there’s also strength in the power of one—a cumulative strength that printing companies can achieve by undertaking the kind of merger known as a “tuck-in.”

A “tuck-in” occurs when one firm acquires certain assets and the book of business from another firm. Generally this is accomplished through an outright purchase, the bulk of which is paid for in the form of an earn-out based on sales retained by the acquiring company. By combining their best features and capabilities in a well-planned tuck-in, the companies can eliminate excess capacity, do away with redundant overhead costs, and avoid duplicative staffing. Although the new entity may be smaller than the sum of its parts, it will be a stronger, more stable operation that's better positioned for growth than either the firms would have been on its own.

New Direction Partners has managed seven tuck-ins in the last year, including the “merger of equals” detailed in “A Merger Going Right!”. In this case, the owners agreed to exchange stock in their firms for stock in a new entity that repaid their investments many times over because of its subsequent success.

But, tuck-in partners don’t have to be financial equals, and the rewards depend on how the deal is structured to the benefit of both parties. One of the owners, for example, might decide to sell unneeded equipment, keep the proceeds, or use the cash to pay down debt—whatever best suits the owner’s long-term business and personal goals.

It’s All in the Vetting

Jim Russell, a principal of New Directions Partners, says that whether a company is considering a tuck-in as a buyer or as a seller, it’s crucial to choose one’s potential partner with care. It’s obviously important, for example, to be certain that the acquisition target is not carrying more liabilities than the new entity will be capable of settling.

Something else to keep in mind, says Russell, is that in most cases, an acquisition target will not respond to a direct overture from another printing company. This is where New Direction Partners, with a track record of having facilitated more than 200 successful mergers and acquisitions, can be the independent third party that makes the tuck-in happen.

As the facilitator, New Direction Partners can evaluate candidates recommended by the client and propose tuck-in candidates of its own. The process begins easily and inexpensively by posting a “Firms for Sale” or “Firms Seeking Acquisition” notice at the New Directions Partners web site—an online destination that has become a meeting-place for many companies that probably would not have made contact otherwise.

Peter Schaefer, another principal of New Direction Partners, says that if a company meets any of the following criteria, a tuck-in with another printer could be its best strategic move:

• There is excess production capacity that can’t be filled.

• The company is struggling financially, particularly when it comes to securing credit.

• In the opposite case, where the company is doing relatively well in its home market, it can identify firms that are struggling to survive there.

• The owner is ready to retire and is looking for a suitable exit strategy.

An Option for Everybody

Tom Williams, also a principal at New Direction Partners, thinks that in today’s turbulent marketplace, one or more of these conditions probably apply to most printing companies. “If you’re not a seller, then you should be a buyer,” he says, adding that the potential benefits of a tuck-in can be “huge”:

• Revenues can be increased exponentially without increasing fixed overhead.

• When the tuck-in is structured so that payout to the acquired company will be derived from revenues in future sales, the acquirer typically can complete the deal with minimal risk and little or no up-front cost.

• The tuck-in brings along salespeople and their active accounts, as well as other staff talent that the acquirer may not have already possessed.

But, the accquirer isn’t the only beneficiary. Russell says that in an “ideal” tuck-in, where the acquiring company makes no up-front payment to the acquiree, the seller also benefits. The seller can obtain cash by selling manufacturing space it owns, liquidating equipment that won’t be needed, and collecting receivables. “There are more opportunities to do these kinds of deals than people realize,” he says, “if they’re willing to be creative.”

Mind the Caveats

However, there are situations in which equipment loans and other debt carried by the acquired company could oblige the buyer to furnish cash at closing in order to pay off the liabilities. The positive news here, says Williams, is that the lenders who financed the equipment purchases probably will avoid doing anything that would result in their having to take back used equipment in the middle of a very weak market for pre-owned printing machinery. When lenders are accommodating, says Williams, the deal can probably go through without requiring the buyer to address these liabilities at closing.

As with everything else in business, a tuck-in can have its tricky elements. Both parties, says Russell, should be prepared to head off the “cultural conflicts” that can arise when two separate teams are merged into one—particulary if staff reductions are involved, as they probably will be. With so much riding on the outcome, he adds, identifying and qualifying suitable partners can be “a distracting process” for companies attempting to do it without expert help.

New Direction Partners, a specialist in all matters pertaining to print industry M&As, understands the pitfalls as thoroughly as it knows the opportunities. Its experts stand ready to help more printers achieve the survivability and the serenity that a tuck-in with just the right counterpart can provide.


To View more merger and acquisition related articles, visit the merger and acquisition section at WhatTheyThink.

Patrick Henry, Executive Editor for WhatTheyThink.com is also the director of Liberty or Death Communications, a consultancy specializing in research, education, promotional, and editorial support services for the printing and publishing industries.

Patrick Henry is available for speaking engagements and consulting projects. To get more information contact us here.

Please offer your feedback to Patrick. He can be reached at patrick.henry@whattheythink.com.



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