Mergers and Acquisitions — Deals That Make Sense

THE LAST 12 months have been nothing if not explosive from a mergers and acquisitions (M&A) standpoint. Look at some of the big names that changed hands:

Valassis acquires ADVO for $1.2 billion.

M&F Worldwide plunks down $1.7 billion for John Harland Co.

Cenveo ropes Cadmus Communications (for $430 million), ColorGraphics, Printegra and Commercial Envelope.

RR Donnelley annexes Von Hoffmann for $412.5 million.

EarthColor bags L.P. Thebault.

Synergy Graphics obtains Sunny Industries.

Consolidated Graphics (CGX) lassos Pikes Peak and Cyril Scott.

American Color Graphics is still in play but needs a savior, and one has to wonder if Vertis Communications will be able to close the deal in the end. CGX did see one get away, as Hopkins Printing ultimately went the employee stock ownership plan (ESOP) route.

The top 20 of the Printing Impressions 400 continues to shrink as the industry continuously evolves and shrivels, then evolves some more. Look at the list from 10 years ago; it is amazing to consider the consolidation that has taken place in so short a time frame.

Where is it all going? Well, the strait-laced commercial printer isn’t finding a huge list of suitors knocking at his door, not on the grand scale at least. Harris DeWese, chairman and CEO of Compass Capital Partners in Exton, PA, and a leading industry transactional advisor, notes that there is but one national buyer of commercial shops in the $10 million-plus range (Consolidated Graphics), while the under-$10 million rank isn’t served by a national concern. Thus, DeWese believes we will see more marriages between regional competitors.

“Larger regional companies that wish to grow are easily sucked in as a potential buyer seeking relatively low-cost sales growth,” DeWese says. “They can carve out from 5 to 12 percent in fixed overhead.”

On the whole, DeWese says that today’s deals are being hammered out based on a justifiable material benefit to the buyer’s performance in the near term, as opposed to the “shotgun approach” of the late 1990s. He expects to see the regional M&A trend continue and doesn’t anticipate any mega deals in 2008.

“We will see more involvement by private equity firms sponsoring an executive to do a buyout, then employing a buy-and-build strategy,” he says. “We’ll see more regional deals and more line extension-type transactions, like a package printer buying another with a different product line.

“The buyers are definitely smarter and are doing a better job of due diligence. There’s better rationale for the deals that they make.”

Market Segment Activity

James Cohen, executive vice president of mergers and acquisitions for Houston-based CGX, notes that much of 2007’s activity centered around market segments, including long-run catalogs, magazines, books, journals, inserts and labels, as well as the “print management” companies that are startups or divisions of larger printers that act as print brokers. He feels most deals fall under one of three objectives: printers latching on to new customers and growing a core business; providing a home for private equity funds; or transforming a printer into the aforementioned print management company in search of higher valuations.

“The deals in the segment of the printing industry that Consolidated Graphics competes in—shorter run commercial and digital printing of marketing materials, POP and direct mail—are largely being executed by a few established strategic buyers,” Cohen says. “I’ve seen very little bona fide private equity interest in our segment.”

Since CGX estimates that its core segment has a size of roughly $50 billion, it represents just 2 percent of a market with extreme fragmentation and numerous opportunities for consolidation. It is the other sectors that are attracting the private equity firms, he adds, such as Wellspring buying D.B. Hess and Bear Stearns acquiring Hilltop Press.

CGX is seeking to acquire companies that fit five criteria: revenues exceeding $10 million; management willing to stay post-acquisition; solid EBITDA and operating income; strong capex history; and a cultural fit with the parent company. The last item is not insignificant, stresses Cohen.

“We don’t buy companies to consolidate facilities and shut plants down,” he says. “We buy them to improve and grow them. We depend on existing management to play well in the sandbox with others, including our 68 other company presidents.”

Cohen anticipates less activity from private equity groups as financing pressures will “reduce the competition for quality deal flow in other industries that are more attractive to them.” In the event of a slowing economy, he predicts a decrease in M&A activity overall, since quality companies won’t want to sell if their trailing 12-month results trend downward and negatively impact potential valuations.

Bob Cronin, managing partner of The Open Approach, a boutique consultancy firm, also sees more deals taking place based on geographic considerations, a trend he sees growing in the coming years. One of the reasons is an ownership base that is aging and unwilling to make investments necessary to maintain status quo or take the company to the next level.

“This ownership recognizes the need for new investment and they’re seeking alternatives because they’re not risking everything they’ve built up for one more roll of the dice,” Cronin says. “They’re looking at some of their local competitors and thinking, ‘This is an ideal fit, we’re in the same space. How can we do better together?’ ”

Cronin feels the most attractive options are companies that have significant control within a vertical market—such as healthcare, retail point-of-sale, or pharmaceutical packaging/labels—or unique products, capabilities or customer bases. Digital printing, direct mail and wide-format, along with UV capabilities, still rank high on many lists. The success of VistaPrint has also drawn excitement toward Web-to-print vehicles.

Much of what happens in 2008 will be dictated by the success of the industry itself, Cronin contends. And when private equity deals don’t work out, it can cast doubt on the viability of that model. The perception might not be accurate, but it exists.

“Some people don’t realize the industry is so huge and fragmented, and that there are so many different segments,” he says. “Just because one area isn’t successful, it doesn’t mean that the overall situation is bleak. People sometimes look at it that way, especially from a financing side.

“Banks are becoming more interested in making sure that they’re going to be able to finance a deal in such a way that there’s less risk. Less risk means less volatility in month-to-month sales. In certain segments, that could come back to haunt us,” Cronin concludes. PI

Flip This Company

Harris DeWese, chairman and CEO of Compass Capital Partners, offers a list of suggestions for those companies that are seeking to put themselves on the market. Before you hang that theoretical “for sale” sign, it behooves you to bear the following in mind:

• Make sure your financials are pristine; if not, be prepared to document any unpleasantness.

• The best candidates for sale have a diversified client base. One account that monopolizes production, or a customer that accounts for 40 percent of overall business, will send up a red flag to potential buyers.

• Undoubtably, 2007 will be remembered as the year of FSC certification. Think green, think environment, and make sure your policies jibe with today’s accepted standards.

• If you have skeletons in the closet and are facing litigation, it’s probably not the ideal time to sell.

• A printer is like a baseball team—its success hinging on the ability of individual stars to perform and the team to come together and play as a unit. And no one wants to take over a ballclub that’s going to lose a boatload of free agents. Likewise, a viable acquisition candidate should have a sales and managerial force willing to stay on board.