Commentary & Analysis
Deck the Halls with... New Year’s Resolutions for the M&A-Minded
In the time-honored tradition of ending the present year with resolutions for improvement in the year to come, New Direction Partners offers guidance for print company owners who may find themselves on one side or the other of an M&A transaction in 2011.
By Patrick Henry
Published: December 20, 2010
Is it December already? As the printing industry closes the book on another eventful year, say the M&A specialists at New Direction Partners, ‘tis the season to be thinking proactively about 2011 and forming clear plans for making the most of the strategic possibilities it will bring. They recommend heading into the new year with a set of objectives—resolutions, if you will—that can open the way to profitable opportunities for forward-looking printing companies of nearly every type and size.
The most prudent resolution that any printing firm can make in 2011, say NDP partners Paul Reilly and Peter Schaefer, is to position itself either as a buyer of another company or as a seller to a new owner. Here are their encouragements for print company owners on both sides of the transaction.
New Year’s Resolutions for Sellers:
“I won’t wait until it’s too late.” File the following story, Schaefer says, under the heading of stuff you can’t make up. He’s referring to the client who called NDP on a Friday afternoon to say that he’d finally come around to accepting the idea of being acquired in a tuck-in. Fine, he was told, but when did he envision the deal taking place? “We have to shut our doors on Monday afternoon,” the client replied.
As preposterous as it sounds, a trap like this can be easy to fall into when owners won’t acknowledge that their business is struggling. Not only is denial “an ego thing,” says Schaefer, it’s a breeder of bad timing that could sink any chance an owner might have of winding down a business on favorable terms.
“I will sell my company when business is stable or improving.” Reilly says that if a company tries to be acquired while it is in decline, “it’s harder to get a deal done, because nobody knows how bad things are going to get.” The seller’s prospects are brightest when the business is stable or improving, adds Reilly, who also counsels letting the sale take place after the benefits of major capital investments have had sufficient time to appear in the seller’s P&L.
In a deal negotiated during or immediately following an investment cycle, he explains, future ROIs that the buyer can’t see at the time of the closing won’t do anything to strengthen the seller’s position. This is a good reason, Reilly says, for deferring the deal until the seller can be sure of putting all of its best assets on offer.
Reilly and other NPD partners will take a detailed look at the subject of timing in this column next month. One of their premises will be that as general business conditions improve, false optimism may cause owners who ought to be focusing on selling their companies to lose their sense of urgency. In NDP’s view, 2011 probably won’t bring enough improvement to give a new lease on life to any company that truly has come to the end of its life cycle. For these firms, they say, reality won’t change just because the calendar does. If their businesses are ripe for acquisition now, now continues to be the best time to sell.
“I will not take my eye off the business before the deal closes.” According to Schaefer, another way to express it is, “I will run the company as if the deal isn’t going to happen until the day it does happen.” He explains that because it’s easy for sellers to become distracted by the intricate details of negotiations with buyers, it’s also easy for them to miss business opportunities that may arise while the discussions are in progress. No deal is ever guaranteed to close, says Schaefer, and rarely do shots at new business come with a second chance for those who overlooked them the first time.
New Year’s Resolutions for Buyers:
“I will pursue tuck-ins as a growth strategy in these difficult times for the printing industry.” NDP believes that among the six general scenarios for exiting ownership of printing business, the deal known as a tuck-in probably is the most expeditious way to match buyers with sellers when print market conditions are sub-par. A tuck-in, Reilly says, can be a “merger of equals” in which the buyer grows and the seller remains involved in the management of the business. Because it can be completed with little or no up-front payment (the buyer is compensated from profits on future sales), a tuck-in also is a low-cost transaction that helps the buyer protect its cash. Tuck-ins are tailor-made, Reilly says, for market conditions that make other kinds of M&As hard to accomplish.
“I will walk away from the target if the personalities or the corporate cultures don’t mesh with ours.” Having reached the stage of negotiations where due diligence takes place, says Schaefer, the buyer errs by focusing only on the numbers. No matter how good the financials look, personal compatibility must also be there as a foundation for future success. “Never forget the human element,” says Schaefer, “when planning and structuring the deal.”
“After the deal closes, I will integrate the plant first, customer service second.” Merging the factory and equipment of two formerly distinct printing companies can be hectic, and the buyer’s main concern naturally will be avoiding production delays. But, says Reilly, something else to avoid during the transition is upsetting clients by suddenly changing the customer service representatives with whom they are used to dealing. CSR relationships are key to business retention, and preserving them should remain a priority while buyer and seller become one operation. As Reilly says, no matter what is happening in the plant, “you always want to have a friendly voice on the phone.”
There’s one more resolution to add to the list:
“When I embark upon an M&A, I will engage the services of an M&A professional.” Although this is good advice for both parties, says Schaefer, it’s especially incumbent upon sellers to market themselves with the guidance of experts. “Most owners sell their companies only once,” he says, adding that without the help of an M&A specialist, the tactical and emotional pressures of planning, structuring, and closing a deal can be overwhelming. “You can’t run your business and sell your business,” agrees Reilly. “They both take 100% of your time.”
But not, hopefully, during this festive and relaxed holiday season. To all of our readers, season’s greetings and best wishes for a prosperous new year from New Direction Partners and WhatTheyThink.