The graphic communications industry has been under unprecedented pressure for the last decade, with the stage set during the 1990s as consolidators, fueled by easy money from an aggressive lending community, rolled up scores of commercial printing operations nationwide. Beginning in the early 2000s, many of these roll-ups came unglued as the synergies the consolidators pitched to lenders and the stockholders of the firms they acquired failed to materialize.
As many consolidators defaulted on the considerable debt they carried, these roll-ups began to fail as they were forced to file for bankruptcy protection and in many cases liquidation. As a result, many firms that took a bite of the consolidator’s apple often were shut down, liquidated or sold, or returned to former owners, many unable to survive in the long term.
The stage was set and the first clouds were formed for what would become the printing industry’s perfect storm. At the same time alternative electronic media were beginning to compete with ink on paper, new digital printing systems based on toner and inkjet were competing with traditional offset processes. As these trends accelerated and a dramatic transformation of the printing industry became inevitable, the economy contracted significantly, and the perfect storm gained momentum.
Relentless Pressure on All Sides
Traditional printing operations saw revenues drop by as much as 30% as print purchases declined and key customers began to employ the services of the print management firms that continue to proliferate. Pricing pressure became an industry-wide problem due primarily to overcapacity and the belief that sales at any price would fix what was broken. Customer needs changed in a weak economy. Digital printing processes became attractive alternatives for the production of short-run, print-on-demand and direct mail products. Non-print media provided customers and their clients with alternative advertising options.
The explosive growth of smartphones, tablet computers, and e-readers now continues the transformation, clearly indicating that a “survival of the fittest” environment has been created. This challenges every traditional printing operation to think strategically and seek a clear path to navigate and survive the perfect storm: either issue a Mayday and sell the boat, or do nothing and watch the ship sink.
Significant numbers of firms have failed in recent years, and the trend will undeniably continue for the foreseeable future as declining sales, debt, poor management, and economic factors become insurmountable for some. Management in denial and those whose misplaced optimism prevents them from seeing the forest for the trees are clearly vulnerable and unlikely to be among the survivors.
One Way or the Other
This perfect storm has created an environment where every firm in the industry must make one simple decision, to be a buyer or a seller. Buyers are those who have embraced the “last man standing” mentality and have the vision, strategic plan, and the financial wherewithal to grow revenue and diversify the services they provide to their customer base. Generic growth is no longer an option. A clearly defined and professionally managed acquisition strategy is the clear answer.
Sellers are those whose businesses may have declined to the point where cash flow is inadequate to service debt or sustain the business as a going concern. Sellers may also be those who do not have the desire or the ability to fight the fight, or those who know that they will receive the highest value for the company’s assets the sooner they convert those assets to cash. For those carrying debt in excess of the value of the company’s assets, waiting for a turnaround is simply being in denial. The longer sellers forego developing, embracing, and implementing an exit strategy, the more complicated, expensive, and painful the exit will be.
With the assistance of competent, industry-experienced advisors, buyers can develop and implement effective and successful strategies to build sustainable operations. This can be done either through the acquisition of bricks and mortar, or simply through the purchase of sales and other selected assets from the seller in a transaction known as a “tuck-in.”
Sellers, on the other hand, are able to implement an appropriate exit strategy and realize maximum value for the assets of an organization that, in many cases, has been built over generations. For these firms, a well-planned exit strategy is the safest harbor in a perfect storm that will rage for a long time before it finally blows itself out.
Thomas J. Williams is a founding partner of New Direction Partners, providing advisory services in investment banking, valuation, financial advisory, and management consulting.