Cary Sherburne: Hi, I’m Cary Sherburne, Senior Editor at WhatTheyThink.com, and I’m here with Peter Schaefer who is a Senior Partner in New Direction Partners. Welcome.
Peter Schaefer: Thank you Cary.
Cary: You know, you guys have got your mitts in a few M&A deals in the marketplace, in the printing marketplace, maybe you could talk to me about some of the different kinds of deals that you are seeing happening today because they’re not all the same, right?
Peter: They’re very different; in fact for the first time in the past several years, we’re seeing three different types of transactions.
Peter: So the first type is the more traditional type which would be companies being bought for multiples of their arnage[ph], that’s what we saw through the ‘90’s, almost exclusive. In the past couple of years, we’re for sure still seeing those types of transactions, but we’re also seeing tuck in transactions.
Cary: And you could explain that.
Peter: Tuck in is a situation in which one competitor is buying the book of business, or the revenues of another competitor and rather than buy all the assets, they will buy some assets, but the primary aspect of the deal is a royalty weight, or a commission weight that’s paid out over time and it’s based on, it’s a percent of the sales that are transitioned over.
Peter: It’s a great opportunity for the buyer because the buyers in almost all printing companies today have excess capacity, so they can move this book of business into their own plant, fill up some of their capacity and not increase their fixed expenses at all because they have it there.
Cary: Okay, great, yeah.
Peter: It’s good for the seller because it doesn’t matter if the seller’s making money or losing money, it only matters how it’s gonna look on the buyer’s income statement. And it’s good for the seller because it beats liquidation. We should not be seeing any printing companies shut down and liquidate today.
Peter: We should see them go into the process of selling their book of business because they will still get the liquidation proceeds but then they’ll also get the commissions on top of it.
Cary: And then the third type?
Peter: The third type is a variation of a tuck in. It’s called a cashless merger.
Peter: And it’s the same type of structure, but there are no royalty payments. Instead of the royalty payments or the future ongoing commission payments, the seller gets stock in the new company.
Cary: Okay. And so, now just looking at probably the most visible one we’ve had recently would be Quad Graphics and World Color. Does that fit into any of those categories?
Peter: Well that would have been a cash – more the traditional cash –
Cary: Okay, more the traditional kind.
Peter: based on the earnings performance. And certainly you’re still seeing those. The problem with those transactions is that the public companies is trading at low multiples. And they can’t afford to pay more than the multiples they are trading at because if they did that, it would be dilutive to their earnings and they would be penalized. So until their multiples go up, the multiples are going to stay low, so you have low multiples and today, because of the state of the economy and the industry, you have low earnings. So, low earnings, low multiples translates at a low price.
Cary: Ah yeah. You know, it was interesting to me to see that happen because, you know, Quad Graphics has always been private and for them to go public was kind of a –
Peter: It was a big deal, wasn’t it?
Cary: Yeah, and you know, Joel Quadracci, I have a huge amount of respect for him, and his comment was, you know, we’ve always managed to the standards of public company and we still – because they still own – the family still owns 80% of the company, they are still able to manage generationally as well, which is a tough balancing act.
Peter: Sure it is. I think its going to end up in a great transaction, but you’re going to see a transition. No question.
Cary: Yeah, it’s a very interesting market; you guys must be keeping busy.
Peter: We are busy. It’s been fun.
Cary: Thanks for sharing with us.
Peter: Thank you, Cary.