M&A: Still a Buyer’s Market?

Printing companies are experiencing a modest reprieve from the very tough market of the past several years, leading many owners to wonder, is now the time to sell?

It’s too soon to tell for sure, however there appears to be a shift occurring. We’re no longer in reverse, headed backwards towards a cliff where all corporate value is lost, nor is the industry in high gear yet, but the latest data and a review of recent M&A transactions in the graphic communications industry indicate that we appear to have returned to neutral.

Long, Hard Road

Looking back, it’s been a long, hard road and a time of declining expectations for many owners in the industry. The market for selling a company has come down a long way from the heady days of the late 1990s when it seemed as if all printing companies were worth six to eight times cash flow, or more.

If you owned a commercial printing company with a good reputation and a solid client list, the buyers would line up and compete to buy the company. There were new consolidators appearing and they all were eager to talk about their roll-up strategy and the value of your company.

Many of the roll-ups didn’t survive, and the premier consolidator to which many aspired to join as their buyer of choice, Consolidated Graphics, has been mostly quiet for several years. In January 2014, Consolidated burst the bubble of many hopeful would be sellers, as it took the exit ramp and was itself acquired by RR Donnelley.

The other great consolidator, Mail-Well, which in its heyday scooped up some of the best and most highly respected commercial printers, changed its name to Cenveo, and since then has been largely absent as a consolidator. Cenveo’s latest buy-side deal was its acquisition of high-volume printer National Envelope in a 363 bankruptcy sale, apparently signaling less interest in acquiring successful commercial printers.

Starting with the dot.com bust and accelerating with the Great Recession, the market conditions for sellers swung completely into reverse as many printing companies struggled to meet their obligations. Enter the “tuck-in” transaction, a nice comforting name for an otherwise uncomfortable transaction.

The words most often associated with a “tuck-in” include eliminate, duplicative, distressed, debt, struggling, excess, redundant, survive, weak, liquidation, restructuring. You get the picture. This transaction structure, in its purest form, is effectively a transfer of one company’s book of business to another company, in return for a commission or royalty paid over time. In the tough conditions during the past decade, the “tuck-in” has been an effective method for an owner to exit his or her business when other options did not exist.

In response to the difficult market conditions, many company owners came to believe that waiting for a “tuck-in” to come in over the transom was their best path to increased revenues. This has been successful for some, but as the process of eliminating excess capacity has run its course, there are fewer distressed candidates available.

As reported in the NAPL State of the Industry Report (Eleventh Edition) and the most recent AMSP/NAPL/ NAQP Printing Business Conditions update, business conditions are still challenging, but we are certainly not seeing the dramatic declines and levels of distress that led to the serial “tuck-in” strategy. The “tuck-In” is not dead, and as the industry continues to consolidate, there will still be instances in which this transaction structure is the best and most efficient, but as a growth strategy you might as well file this approach right next to “waiting for the tide to lift all boats.”

A Fork in the Road?

It appears that we may be at an inflection point in the market. We have not, and may not ever, return to the heady days of the roll-up consolidators spreading wealth to the commercial printing industry, but a change is afoot.

We are receiving fewer calls of desperation and more calls for strategic planning in advance of a sale. There are fewer requests from owners desperate to liquidate, restructure, and eliminate, and more conversations about an orderly and rigorous sale process to canvass the market to find the buyer with the best and highest offer for the value that an acquired company represents.

Printing companies are showing profits, and conversations once again include concepts such as the multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The value of the seller’s assets is being discussed and given weight in offers. Earnout provisions, based on the going-forward value of the book of business, are still part of the picture, but not the whole picture. For those company owners who have weathered the storm, the road ahead appears clearer, with more options on which exit ramp they choose to take.

Another, less anecdotal, view of the industry’s prospects emerges from the recently published AMSP/NAPL/NAQP 2014 Critical Trends Report. The companies surveyed reported a 5% increase in revenues on average. For the top quintile, sales were up a very respectable 13.5%. More than 80% expect sales to increase this year by 7% on average, and more than 70% expect profits to increase as well.

While over 40% of respondents expect sales and profits to increase partially due to failed competitors, less than 2% are relying entirely on industry consolidation. In other words, companies that expect to grow sales and profits are expecting the number of competitors to shrink, but are not focused on trolling the market for “tuck-ins;” rather they are managing the factors that they can control.

Full Speed Ahead?

In a nutshell, this means that smart buyers with well-defined strategies are returning to the market. These companies are serving specific market niches or have developed a highly efficient production system and/or a sophisticated order acquisition model. These industry leaders are seeking to acquire other profitable and well-run companies. They arrive at the closing with their checkbooks, not just a promise of future payments.

Looking back over the past several months, industry consolidation has taken a decidedly upbeat turn, with several very highly respected companies deciding that now was the time to make the move and sell. Among them:

Strine Printing in York, PA., a commercial printer that has evolved over the years, adding packaging and retail display, announced in March that it was being acquired by the family-owned Menasha Corporation of Neenah, WI, a global packaging and display company.
Award-winning Classic Graphics in Charlotte, NC, was acquired in December 2013 by Imagine! Print Solutions in Minneapolis, MN. Before December was out, Imagine! Announced another deal, acquiring Creative Marketing Solutions, also in Charlotte, and will be rollingthe operation into the Classic Graphics facility.
Thomson-Shore, an employee-owned company in Dexter, MI, which specializes in printing books, acquired PublishNext, a Seattle, WAbased online service that assists authors to self-publish their work by providing design, editing, and other services.

These are just a few examples of deals in which buyers selectively and strategically acquired companies that are additive to and complement their core competency, and in which the sellers have identified and joined up with larger companies that value the sellers’ unique services and market position.

Seller’s Map

So what should a prospective seller be doing in today’s market? First and foremost, plan strategically for your company’s future, and execute on that plan. A well-managed company that uniquely serves a well-defined customer base will be worth more to a strategic buyer that values that uniqueness.

In the examples above, you may notice that the buyers were all located in different geographic areas than the sellers. The companies were worth more to those buyers than to a local undifferentiated competitor that just wants to “tuck” sales into its production facility.

Be prepared and be realistic. Obtain a valuation based on industry standards with a focus on the unique strengths of your company, and have it updated annually or at least once every two years.

If you are not personally keeping up on valuation methods and current multiples in your particular segment of the industry, it’s worthwhile to find someone who has that objective and industry-specific knowledge. When you do decide that the time is right, you will have a clear target price that you should be able to achieve.

Decide if you want to engage in a negotiated private sale where you have identified in advance the buyer you believe will offer the highest price for your firm. This is common in our industry and especially prevalent among smaller companies and those in distress.

Most often, this type of sale is between owners that have an established relationship, and where both parties perceive that there is a good fit. Advantages are the ability to close quickly and the likelihood that strict confidentiality can be maintained since the company is not “on the market.” However, the seller in a private sale may be at a disadvantage when it comes to the final price achieved, since there are no competing bidders for the company.

If you prefer to conduct a wider search for the best offer, consider engaging an advisor to conduct the search and manage the process for you. Done properly, a search may uncover buyers that are geographically diverse, strategically a better fit, and/or financially able to offer more for your company with better terms.

On the minus side, despite the best intentions and confidentiality agreements, a search by definition discloses the intention to sell to a greater number of people, with the attendant risk that competitors will take advantage of the information.

If you do decide to run your own sale process, or if you want to engage an advisor, be cognizant that the most important aspect during this time is that the business continues to be well-managed and profitable.

A Baker’s Dozen Tips For a Better Sales Price

The following are 13 brief guidelines for gaining a higher value when selling your company:
Seek Buyers Who Strategically Benefit from the Acquisition
Improve EBITDA on a Sustainable Basic
Develop Management Depth and Retention
Build a Diverse Customer Base, Ideally None Greater than 10% of Your Total Business
Seek, Acquire, and Document Your Recurring Revenue Streams
Offer Specialized Services to Niche Markets
Create Barriers to Competitive Entry
Create Upside Potential with New Customers & Services
Create Perception of Industry Leadership
Develop and Execute a Strategic Plan and Measure the Results
Maintain Excellent and Consistent Records (Financial and Operations/Productivity)
Know, Document, and Update Your Company’s Valuation
Accentuate the Positive, Address the Negative