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M&A Mythbusting: Just How Good an Investment Is a General Commercial Printing Business?

Some think that general commercial printing companies aren’t worthy targets for acquisition by other printing firms. That’s a major misperception, say the M&A experts of NDP.

By Patrick Henry
Published: June 12, 2012

Tough economic times can be poor environments for dealmaking—a hard fact of life that also applies to mergers and acquisitions in the printing industry. Valuations are down, cash for M&A investments is tough to come by, and potential buyers can be more than a little gun-shy about opportunities they would otherwise leap at in a more favorable climate for business expansion.

Jim Russell and Peter Schaefer, partners in New Direction Partners (NDP), see another deal-suppressing trend at work: the belief, held even by some industry insiders, that general commercial printing companies aren’t worthy targets for acquisition by other printing firms. Although it’s a perception they strenuously reject, both acknowledge the tangled roots it springs from.

First is the inescapable reality of the industry’s ongoing shrinkage. Research by Printing Industries of America (PIA) and other sources shows that the number of printing plants continues to fall at a rate of about 1,000 to 1,500 plants per year. with employment dropping in tandem. Volume and shipments per plant also declined dishearteningly during the “Great Recession” of 2007-2009.

The general commercial printing sector has absorbed the worst of these blows, leaving even well-managed, financially secure firms looking less attractive to buyers than they should appear. And therein, according to Russell and Schaefer, lies the myth to be busted.

Why the Long Face?

“The commercial space may be contracting, but that doesn’t mean it’s disappearing,” Schaefer says. Projections from PIA bear him out. The association has said that in 2020, the printing industry will still have a large economic footprint and will continue to hire tens of thousands of new employees annually—hardly a scenario for a memorial service.

What’s more, says Russell, contraction isn’t altogether a bad thing: fewer firms can mean an easing of overcapacity, and the winnowing-out of weaker businesses makes the strengths of the survivors that much more apparent. He and Schaefer argue that a general commercial printing firm wishing to be acquired still has a fair shot at making a good deal with an accommodating buyer—if it can show that it has the characteristics of a printing business that’s being managed for the long haul.

Diversified capabilities and multiple revenue streams are what buyers find most desirable in acquisition candidates, Russell and Schaefer agree. Thinking beyond the offset press department is crucial, since that part of the operation, no matter how productive it is, may not be enough to sustain the business as a whole in years to come. Firms that have expanded into ancillary activities—for example, mailing and fulfillment, digital printing, and wide-format graphics—will stay out of the commodity trap that always threatens businesses with only offset services to offer.

Web-to-print—the Internet-enabled sale and production of print—is another capability that makes commercial shops look good in the eyes of buyers, Russell and Schaefer say. Now that printing has come into its own as a form of computer-integrated manufacturing, it’s necessary to present the same level of automation on the customer-facing side. When prospective acquirers know that a W2P solution is in place, they also know that the target is making it as easy as possible for customers to place, monitor, and repeat their orders.

Plan for Success with Succession Plan

Technology isn’t the only factor that buyers and their professional M&A advisers will consider when sizing up a potential acquisition. They also will ask, says Russell, “Is the seller’s strategy forward-looking? Is the owner thinking not just about the payout, but about what will happen after the close?” What the seller must be prepared to show here, he says, is the existence of a management succession plan.

“Succession planning is a must,” Schaefer agrees, noting that buyers often will insist on having a management structure in place as a prerequisite for closing the deal. Even if a firm isn’t seeking to be acquired, he says, it still needs to be clear about how management roles will be filled after those presently occupying them have moved on. Some firms have found their growth prospects stunted precisely because they failed to identify the next generation of leadership, Schaefer says.

A company’s financial discipline, or lack thereof, is certain to come under scrutiny in the due diligence phase that follows initial negotiations in an M&A. What will please the buyer and its auditors, says Russell, are a manageable debt load and evidence of reinvestment in capabilities that can drive future growth. Excessive compensation to owners and other signs of financial profligacy will have the opposite effect.

New Owner, New Beginning

Positive traits like these, say Schaefer and Russell, make general commercial print firms well worth looking at as acquisition targets, even in a sluggish economic climate. They note that businesses of this kind often do best by structuring the deal as a tuck-in: a transaction that compensates the owner of the acquired company with revenues from the merged entity’s future sales. Once the deal is closed, says Schaefer, the new owner probably will be in a good position to adjust customer pricing and take other income-enhancing steps that were unavailable to the seller.

Broadly speaking, say Russell and Schaefer, general commercial printing firms are better off than they were a year ago, even if the improvement has been relatively modest. As advisers to M&A-minded investors, they remain convinced that these businesses have a great deal to offer potential acquirers—and they’ll be happy to make the case to anyone whose confidence doesn’t match theirs.

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.

 

Discussion

By Terry Tevis on Jun 12, 2012

A good summary on why the Tuck In is so popular vs. the acquisition. Key is volume to the new owner that enables the buyer to improve margins by moving from customers from "tired iron", "tired software", and poor CRM to more a productive printing process with improved over head absorption. The only thing I disagree with in the commentary, improved pricing. I have never seen a deal where the new owner could increase pricing post closing. In many cases to keep the acquired customers from bolting, lower pricing may become necessary, as certain people do not make the cut in a Tuck In! It is the absorption of fixed costs with more volume and hours that improves the buyer's margins

 

By Gary Ampulski on Jun 12, 2012

Good discussion but it is missing one very critical element -Valuation.

In today's environment, a seller can sell and a buyer can leverage assets and acquire but can the two meet with a realistic view of what the business is worth? Too many opportunities fall apart because the the seller has an expectation born out of the pre-recessionary debt-laiden prices that still exist in the minds of many business owners. It would be great if someone could publish benchmarks of what businesses in this industry are selling for these days based on the various factors that influence value to show the realities of current transactions.

The fact is, if the business has a good mix of services, low customer concentration and generates double digit margins, but cannot show a good strategy for sustainable growth, it will still struggle to get over 4X EBITDA, depending on size, even from a strategic buyer. Why? Because that's where the industry is trading for public companies of significantly greater size and this is the group that sets the pricing as strategic buyers.

Yes, there is a market for a good business but the seller needs to have an educated view of what his business is worth before waisting anybody's time initiating a sale process.

 

By Patrick Henry on Jun 13, 2012

Terry, Gary, thanks for your comments. Regarding valuation for EBITDA, readers might want to review a column on the subject from last year:

http://whattheythink.com/articles/49728-pouring-another-cup-o-joe-essentials-m-valuation/

 

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