Commentary & Analysis
M&A Activity to Remain on the Upswing as the Industry Regroups
Despite the industry's shrinkage, printing companies continue to be born “under the radar screen” as firms win new leases on life by merging with other firms. New Direction Partners foresees an increase in M&A activity as the industry regroups around the strengths of its healthiest and most survivable firms.
By Patrick Henry
Published: March 17, 2010
In one of his recent audio charts for WhatTheyThink, Dr. Joe Webb estimates that from 2007 to 2009, the printing industry may have lost as many as 2,844 establishments and 64,700 employees. But despite this alarming shrinkage, says Dr. Joe, printing businesses continue to be born “under the radar screen” as firms relaunch in new guises or, more commonly, win new leases on life by merging with other firms.
This trend is also apparent to New Direction Partners (NDP), a consultancy that plans, funds, and negotiates mergers and acquisitions in the printing industry. Having arranged a number of successful transactions in the first quarter of the year, NDP foresees an increase in M&A activity as the industry continues to regroup around the strengths of its healthiest and most survivable firms. For printing companies whose survivability may be in doubt, NDP has one heartfelt piece of advice: never consider shutting down when strategies exist for keeping the doors open and the presses running.
Paul V. Reilly, an NDP partner, says that most of the M&A transactions taking place in the commercial print sector are tuck-ins, in which a healthy company acquires the customer base of a less healthy company by contracting to pay the acquiree a royalty on future sales. The remainder are cashless mergers, an arrangement that gives each party a share of the new entity being formed.
Full Gamut of Opportunity
Peter Schaefer, another NDP partner, says that although the acquisition of underperforming businesses by stronger firms continues to be the predominant trend, economic recovery in 2010 should make healthier businesses more attractive as acquisition targets as well. In the last few months, NDP has closed a gamut of transactions ranging from the tuck-ins of troubled firms to a six-times-EBITDA sale—the first time in a long time, says Schaefer, that the M&A market has displayed this broad a range of opportunity.
Nevertheless, Reilly believes that the trends will be toward more M&As, not fewer, as conditions remain generally difficult and as the demand for many kinds of printing continues to decline. He believes in particular that the pace of tuck-ins will not abate this year, seeing their frequency both as an indication of the industry’s lingering weakness and as a sign of renewed interest in this M&A alternative.
“Commercial printing companies are not getting any better,” he says, adding that for many firms in these difficult straits, a tuck-in can be “a mode of survival.” He’s convinced that what he calls “a pent-up demand” for tuck-ins will only increase as consolidation in the industry continues.
According to Reilly, not as many printers went out of business in 2009 as market forces would have led industry watchers to expect. This is attributable in part, he says, to the owners’ natural reluctance to shut down, and in part to the difficulty many of them would have had in liquidating their equipment if they had attempted to close. He emphasizes, however, that no printing company should succumb to the idea that bad times make going out of business inevitable.
“Overcome your pride,” he says. ”Nobody should close their doors. If you’re thinking of closing your doors, stop it.” The better decision is to consider how a well-structured tuck-in with the right partner can revitalize a struggling business and, in many cases, provide continuing employment for its loyal staff members.
Even businesses in relatively good shape can take advantage of tuck-ins, which are by no means only for firms in trouble. Schaefer says that a company with a strong balance sheet may see more proceeds from a tuck-in than it would from an EBITDA-based transaction, especially if its sales have taken a downturn. And, given the difficulty an acquirer might have in raising the necessary up-front cash for an EBITDA-based purchase, a tuck-in may be not just the best but the sole option for a small commercial printing firm seeking acquisition.
Growth for the Taking
Benefits accrue on the acquirer’s side as well. “If you’re a commercial printer, there’s no better way to grow than to buy a tuck-in,” advises Schaefer, noting that sales growth achieved this way can be less expensive than growing organically. A tuck-in can be especially attractive for a healthy firm dealing with a recession-driven sales slowdown, according to Schaefer, who sees the cumulative effect of tuck-ins as part of the reason that industry sales have not plummeted apace with the sharp decline in the number of printing firms.
He also points out that a tuck-in can also give the acquirer a financing option that could come in very handy in a tight market for credit and capital: the ability to borrow against acquired receivables as a way to fund the growth that will occur as a result of the deal.
As Schaefer says, the pattern of tuck-ins and other M&A transactions for the rest of the year will depend on the kinds of businesses that acquisition-minded printers are looking for. “The more specialized you are, the better,” he says, adding that digital printing businesses should find themselves in the strongest demand.
Reilly says that regardless of their size or their specialty, printing companies wishing to grow in today’s challenging climate should plan to do so by merging with other companies. While outright acquisition may still be a strategy for very large companies with the financial resources that such deals require, smaller commercial printers should look to tuck-ins as their surest path to expansion.
Laying the Groundwork
To printers facing adverse conditions that they may not be able to overcome, Reilly repeats his admonition against giving up. He says that a printing company can prepare itself to become a candidate for a tuck-in by developing a convincing narrative about the long-term value of its customer base. There also should be a plan for disposing of unneeded equipment and similar items on the balance sheet so that the tuck-in can proceed smoothly.
A would-be acquirer should identify its tuck-in targets with care, seeking the help of a professional M&A consultant both to draw up a list of candidates and to manage the initial overture and subsequent negotiations. The acquirer also needs to be certain that it can obtain the financing it will need to close the transaction and fund the growth expected follow.
Printers can initiate the process by listing themselves online either as wishing to sell their companies or seeking to purchase existing books of business. In all cases, the process should begin with a clear vision and the advantage of expert advice. Whether the printer intends to acquire another firm or wants to be absorbed by one, says Reilly, “it’s essential to make your intentions known and to work with an investment banker.”