We received the following in response to a recent article at Printing Industry Merger And Acquisitions, a special section of WhatTheyThink that tracks and analyzes M&A activity in the industry. The article profiled the recent launch of MSP Digital Marketing, a venture that will invest in building a network of specialty printers and other digital services for marketing communications.
The writer of the comment below is Terry Tevis, who formerly headed three major divisions of R.R. Donnelley and also served as chief executive of other major printing enterprises including Printing Arts America and American Signature. He has played key roles in numerous M&As and turnarounds and presently serves as a consultant to the printing and publishing industry in these and other areas. Tevis also sits on the advisory board of the M.A. in Graphic Communications Management and Technology program at New York University.
While I am always looking for reasons to be bullish on any type of strategy around print, roll-ups are not the way to build companies anymore, if they ever were. Leadership and a strong balance sheet continue to be the critical components of a successful printing company. This seems to hold true in "big print" with RR Donnelley continuing to do well vs. the Quebecor/World Color and Vertis deals. Yes, Quad is acquiring World, but for only $1.2 billion in bargain basement pricing. Consolidated Graphics (CGX) is stalled, and Innerworkings is going nowhere fast. That is why your article surprised me.
A network of digitally focused printing companies is not a long-term bet to succeed. The 6-times-EBITDA deals are dead, savings from SG&A and purchasing no longer support the covenant demands, and with all print continuing to shrink, the only revenue improvements come from market share gain through lower prices. While I have the highest admiration for the talents of Roy Grossman, what financial institution in this environment wants to leverage up a print-related roll-up? CGX remains the most successful, and it is not the deal-making machine of the last 15 years anymore.
The haircuts that bondholders took from Quebecor/World Color and Vertis will continue to impact any appetite for print related deals, no matter how much more focused on digital print vs. offset. Small PE companies may still have access to funds for the types of deals Roy is trying to lead, but in my work with many of them, no firm wants to fund printing of any kind. Their questions are relatively simple: If print is shrinking 3%-5% per year due to other content channels, what is the possible exit strategy for any deal? Remember, according to Dr. Joe Webb, we have seen print decline from a $135 billion in 1995 to a forecasted $85 billion in 2010, with even worse results if one takes inflation into account. Other than VistaPrint, where has any equity play worked in print over the last five years?
While I agree with Roy that digital print will continue to gain share from offset, there is not enough synergy in a roll-up to overcome the acquisition multiple. If the team Roy has assembled had put this strategy in place 10 years ago when money was easy, with Roy at the lead they might have built a VistaPrint rather than a digital printing clone of Consolidated Graphics. At any rate, I wish them well and hope I am wrong.
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By Bob Rosen on Feb 24, 2010
ROLL-UPS MUST BE MORE THAN JUST CHANGING THE NAMES ON THE STOCK CERTIFICATES.
I normally find myself on the other side of postings such as this, so I'm in unfamiliar territory.
I think a more accurate observation might be: "Roll-ups were stillborn from the outset." The current difficulties are NOT due to funding shortages, or deal pricing. It's because so many of the industry roll-ups didn't have an operating strategy that added meaningful value to the deal.
Merely consolidating ownership of a group of companies and (allegedly) squeezing out some redundant costs hardly constitutes a strategy worthy of financial support. All too many of the industry roll-ups were done by deal people, and not by people with a sense of how to make the new combined entities operate in a fundamentally better way - thereby delivering value to customers and investors alike.
Meaningful value isn't created by playing an arbitrage on pricing multiples. There are lots of good business combinations being made -- but almost all involve companies with significant business reasons to combine -- genuine operating and marketing reasons, not just deal-driven reasons.
So we ought not to mourn the passing of the roll-up phase of our industry. It looked too good to be true. It was. But the tuck-in phase -- genuine business combinations in every sense -- is only beginning.
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