CONSOLIDATED GRAPHICS -- The Art of Acquisition

Fresh, intensity-riddled faces swarmed the lobby of the Houstonian Hotel, most of them young enough to appear in auditions for an MTV reality show. But aspiring actors these youngsters were not--they hoped to become role players in the ever-growing printing industry dynasty best known by its stock symbol: CGX.

It was late July, and the sixth annual Consolidated Graphics (CGX) National Associates Meeting was in full swing. Despite the fact that most of the participants' drivers licenses indicated a birth date in the 1980s, these participants boasted a confidence, an eager aggressiveness and a tireless optimism regarding their present and future roles with the company.

Chairman and CEO Joe Davis, who had his misgivings about such a gathering heading into the first meeting in 2000, is awed at the timber of participants in the 2005 crop.

"Based on their presentations, I'm really impressed with the quality of the 24- and 25-year-olds we have in this group," Davis says during a time out from the individual breakout sessions. "When I was 24 or 25, I was not at a level quite that good, I can assure you."

If Davis was behind the lead pack at any point in time, suffice it to say he has since picked up the pace. He is the leader of an $873 million a year printing empire. Davis was M&A when M&A wasn't cool. When the capital venture posers decided to latch on to the printing world, Davis kept his head, his game plan and strategic footprint in place. Before long, the best of the rest that M&A had to offer floundered and foundered.

Not Everything Changes

There's no remorse associated with an acquisition by Consolidated Graphics, no icky feeling that would prompt a company to change its name. In fact, keep your name; CGX likes it as much as they like the management team that was in place beforehand.

As for assimilation? Integration? Forget the melting pot. CGX's acquisitions are one reason its balance sheet is so enviable, not because its acquirees fall into lock step.

"The most significant change that we ask them to do is a payroll conversion," Davis says. "Thus, they match the payroll cycles and enjoy the benefits of our payroll program."

Kelmscott Communications was the biggest printer to make CGX's payroll conversion in 2005. Kelmscott ranked 53rd on the 2004 Printing Impressions 400 ranking with sales of $110 million, pushing CGX's overall sales north of the $870 million plateau. Chris Colville, executive vice president and CFO, not to mention arguably the most recognizable face on the printing industry M&A landscape the past decade, single handedly orchestrated the deal for CGX.

Kelmscott was, of course, one of a number of consolidator rollups that flashed onto the scene in the late 1990s. When the recession and 9/11 hit, virtually all of the non-CGX consolidators fell on hard times, filed for bankruptcy, were split back up and sold/folded, or backed away completely from the M&A landscape. Ground-shaking mergers were still taking place--World Color with Quebecor; Moore with Wallace, then Donnelley--but the transactional climate had shifted.

"A number of companies were ripe for acquisition in the late 1990s, and most were acquired by somebody," Davis remarks. "There hasn't been a significant number of acquisitions in the printing industry over the past six years, so a lot of companies have matured and are now ripe for acquisition.

"Declining financial results during that period has kept owners from selling, because they haven't been able to get what they'd like for their retirement. But there's been a pick-up in the industry and companies are making more money, which will enable their owners to attain better prices than they could in the past."

According to company research, Colville estimates CGX has a 2 percent share of the $40 billion, highly fragmented general commercial market. With about 8 percent tied up by multi-facility companies like Earth Color, that leaves a significant amount of single-location printers flying solo.

Name Your Price

"The way we look at it is--for a price--all of that 90 percent is for sale," Colville says. "And some of that remaining 8 percent are likely to be sellers, as well. Kelmscott was in that 8 percent. If the economy continues to improve, we expect to accelerate our pace of buying individual locations from that 90 percent."

Company number 71 joined the Consolidated Graphics fold only weeks before this issue's publication. In early October, CGX signed a letter of intent to acquire Atlanta-based Graphcom Inc. Plus, CGX recently brought in veteran M&A man Jim Cohen to head up the company's transactional efforts.

"I believe the most compelling value proposition to the owners of companies acquired by Consolidated Graphics is our business model, which is based on maintaining the company's name and heritage, and giving management the autonomy to run the business day-to-day with the benefits that a large printing company can provide," Cohen states.

But the CGX empire was not built on acquisitions alone. A driving force in the company's sustained growth is its commitment to capital expenditures. Just prior to the PRINT 05 & CONVERTING 05 show in Chicago, CGX and Komori announced they had extended an agreement that had already seen the printer plunk down roughly $80 million. Nine more Lithrone sheetfed presses have been ordered, at a price tag of more than $15 million.

Heavy iron is only part of the equation; CGX spent $27 million for new technology in 2004, and the final tally for 2005 should reach about $35 million. Davis claims to maintain one of the finest prepress departments in the country, which sets the company back roughly $5 million a year.

More Than Printing

Another $1 million annual commitment comes in the form of CGXSolutions, a suite of online tools designed to make the print procurement process easier. Among the services offered are remote proofing, digital asset management, digital printing and fulfillment.

Further bolstering capabilities at the facilities level is CGX's partnership with MetalFX, which has licensed the printer to promote its metallic printing ink technology. The process is used to produce hundreds of metallic colors in one pass on-press, sparing the expense of producing multiple spot colors.

Augmenting the company's willingness to keep its machinery and capabilities in line with current technology is CGX's commitment to employee training. In addition to the Leadership Development Program (see sidebar), the company places an emphasis on cross-selling opportunities. The presidents meeting, held twice a year, fosters the networking concept among the different company heads.

"We build relationships, and individuals work best with people that they know," states Aaron Grohs, executive vice president of sales and marketing. "Then, after they get back to their offices, they can call a fellow president and tell him, 'I have this project, have an idea...can you help me out?' They can leverage each other's capabilities, and it's part of the reason why our cross-selling efforts continue to improve."

Participants share best practices at these gatherings, build relationships with their CGX counterparts and discuss their unique capabilities. The parent company also uses the opportunity to chart its course for the balance of the year, according to Grohs, and to provide a big picture glimpse for the presidents.

Moving forward, the brain trust behind CGX sees some of its best market opportunities in growing its already considerable mailing and fulfillment operations. Expanding certain product specialties, including temporary point-of-purchase displays, is also on the horizon.

Davis feels internal efficiencies can be reaped in the front office, thus CGX is exploring technologies that would garner cost savings in areas such as billing, purchasing and scheduling.

Grohs, for one, is excited about the company's foray into the digital printing realm. "The digital platform is a nice complement to our sheetfed offset business," he says. "If we continue to listen to customers and try to understand where they're going with their businesses, then we stay open to those technologies that add value. We'll continue to grow with them."

Davis is a firm believer in the past being one of the best predictors of the future, and he only needs to point out CGX's growth record in such a short period of time. Given the industry fragmentation that still exists, along with a wave of baby boomers who will soon seek to retire, CGX still has room to grow.

"I don't see any limitation on how large this company can become," Davis concludes. "We'll continue to do a good job of servicing our customers, maintaining profitability and keeping an eye on the ball."

Super Human Resources

In the early 1990s, Joe Davis looked at his still-fledgling Consolidated Graphics and saw boundless room for growth. What he didn't see was enough up-and-coming people who could carry out his vision.

Davis concluded that the best way to populate the CGX empire with intelligent and highly motivated leaders was to seek them out on the college campuses across the country. A formalized training program followed shortly after, and the Leadership Development Program (LDP) was born.

In the years to follow, the program has become more sophisticated, and has paid handsome dividends. Mike Barton, executive vice president and chief administrative officer, has overall responsibility for the program under Davis' direction. Rachel Koenig, Ed.D., is the company's national manager of recruiting and development. During the spring 2005 semester, Koenig and her recruitment squad interviewed 1,200 prospects across 70 campuses. In the end, a mere 50 ultimately joined the program.

"We look for students with a good work ethic," Koenig says. "Someone who has demonstrated that by waiting on tables in school, worked in construction or in a warehouse. It proves that they're not afraid to roll up their sleeves and get dirty. These are the kind of people who are willing to put in the hours that it's going to take to become successful at printing."

Ten graduates of the two- to three-year program are now company presidents, while many others hold high-ranking executive positions within Consolidated Graphics. Some end up getting hired by CGX customers and even the competition--a small price to pay in assuring that the company's future rests in capable, qualified hands.