An M&A Buyers Guide for drupa

With drupa 2016 just a few months away, naturally the industry is thinking about the new capital investment opportunities that a show of this scope and size brings with it. Every drupa takes the industry to a new stage of capability with equipment and systems that redefine entire segments of graphic production. After the show, wish lists turn into shopping lists as printers realize that in order to stay competitive, they’ll need to acquire some of these capabilities for themselves.

As advisors to companies planning ahead for mergers and acquisitions, we’re all in favor of strategic capital investments — provided that they’re the right ones. A printing or packaging business with a progressive mix of technology is a company that will attract more attention from buyers than a company that has failed to modernize. The more technologically up-to-date sellers there are for buyers to choose from, the more vibrant the M&A marketplace becomes for everyone.

We’ve said before that digital printing is where the smart money is when it comes to adding capabilities that buyers and investors are interested in seeing. Today, digital printing is about much more than just putting toner or inkjet ink on paper. New markets have opened up for digital shops that can print on plastic and other non-paper substrates for things like signage, banners and vehicle wraps — applications that used to be out of the mainstream of commercial printing but now represent some of its strongest growth opportunities.

One of our clients transformed his business, a general commercial print shop, in precisely this way. He gets better margins from printing on plastic than he does from printing on paper. Although he’s not a trade printer, he’s acting as a subcontractor to other printers that don’t have the ability to print on plastic.

Improved profitability with expansion into new markets: this is what business differentiation is all about, and it’s a key to success for sellers in M&As. There’s nothing inherently wrong with being a plain-Jane commercial printing business, but a company that hasn’t shed that image as it prepares to sell may have a difficult time being acquired as a going concern. Fortunately, with digital equipment — especially wide-format systems — there’s a logical progression from paper-only production to output on textiles, films, canvas and other materials that make a company and its market profile distinctive.

Another judicious investment is in workflow: software that optimizes production and feeds the data it generates into the plant’s business management systems. One of the things that makes workflow fascinating is the fact that it addresses so many different aspects of production.

One of our clients, for example, has a digital color management system that automatically makes precise color matches to ink density from prepress data — a huge improvement over old routines from the swatchbook days. By eliminating errors, waste and redundant touch points, workflow improves productivity and profitability wherever it is applied.

There are many ways to use systems and equipment to make a printing business more marketable, but every investment in technology has to be cost-justified on its own merits. Our general advice to clients is that if the investment will enable the business to serve an existing demand that it isn’t currently equipped to meet, spend the money. An investment for entry into a new market also gets a green light as long as the market has been thoroughly researched and potential customers are known (not just assumed) to
be there.

Investments in digital equipment are helped by the fact that these devices are less expensive than they used to be. Methods of financing their purchase have also changed. Nowadays, buying a digital press often means leasing it under a lease plan based on click charges. The payments don’t appear on the balance sheet as long-term debt — an advantage to sellers when their financials undergo due diligence during M&A negotiations.

Digital equipment tends to fall into obsolesce quickly, so lease terms are typically short. This can be another plus for sellers as it keeps them from being tied to equipment that a buyer might not want. One of our customers, for example, will come to the end of a digital equipment lease at about the same time a deal for the acquisition of his company will close. Because the buyer has standardized on another type of equipment, the seller’s device won’t be missed.

For would-be purchasers of offset equipment, there’s more to be cautious about. If selling the company is a near-term goal, we probably would advise against buying a new offset press unless one is needed right now to handle overflow work. One alternative is to outsource the overflow to a trade shop. Another is to consider purchasing a pre-owned machine instead of a new one. Plant liquidations have sent a large number of well-maintained and affordably priced presses into the used equipment market in recent years.

Whatever is on the shopping list, beware of excess leverage. Financial leverage is the ratio of debt to equity. We would consider a company to be to highly leveraged if debt were more than three times equity. High leverage negatively affects the salability and value of a firm. Avoid falling
into its trap.

Buying smart is good strategic execution in a drupa year or any other year. As a print company owner, you should always plan your capital investments with a future sale in mind, even if the transaction is still a long way off. Take stock of your company’s marketability now, and think about what new capabilities you will need to put it in its best possible light for a prospective acquirer.

That way, if you’re going to the show — or if you’re following the drupa 2016 news here in Printing Impressions — you can shop and buy with confidence. PI

About the Authors
Frank Steenburgh and Thomas Williams are partners in New Direction Partners (NDP), the leading provider of advisory services for printing and packaging firms seeking growth and opportunity through mergers and acquisitions. NDP assists its clients by giving them expert guidance and peace of mind at every stage of the process of buying or selling a printing or packaging company. Services include representing selling shareholders; acquisition searches; valuation; capital formation and financing; and strategic planning. NDP’s partners have participated in more than 300 mergers and acquisitions since 1979. Collectively they possess over 200 years of industry experience with transactions in aggregate exceeding $2 billion. For information, email info@newdirectionpartners.com