CONSOLIDATORS - Slowing, but Growing

BY ERIK CAGLE

When history compares the years 1998 and 2000 in regard to consolidation in the printing industry, two starkly contrasting results will be evident to the naked eye. There really is no comparison, as the degree of major consolidation has slacked off dramatically.

Perhaps it is more important to note that the state of the industry during 2000 was not all that dissimilar from 1998, at least not from close range. Hindsight may eventually offer greater perspective, but the fact of the matter is the economic condition alone did not cause M&A activity to take a back seat. Wall Street rubbed its chin and furrowed its brow after a while, which may have contributed to some public consolidation conglomerates to temper the degree of activity, but one notion is indisputable. Feast all you want, but sooner or later, you need to push away from the table for a little while.

The year 2000 may have featured a little nibbling, perhaps some pie with whipped cream, but now it's time to digest...and integrate. While they're catching their breaths and enjoying an after-dinner coffee, Printing Impressions caught up with four of the leading industry consolidators for a Q&A: Carl Norton, chairman and CEO of Houston-based Nationwide Graphics; Joe Davis, chairman and CEO of fellow Houstonian, Consolidated Graphics; Bruce Thompson, senior vice president of Englewood, CO-based Mail-Well; and Robert Kashan, CEO of IGI/Earth Color, New York City. Kelmscott Communications, of San Francisco—another high-profile consolidator—respectfully declined to participate due to a heavy work schedule, but promised to be back in the news before long.

PI: List your acquisitions that occurred this year, if any.

Norton: Nationwide did not make any acquisitions in 2000.

Davis: We haven't made any acquisitions to date in 2000. We've certainly looked at some good companies and are in negotiations with several of them.

Thompson: While 2000 has certainly not been as active for us at Mail-Well in terms of the number of acquisitions as have some past years, it was our second most active year in terms of acquired sales—more than $560 million. Obviously, our acquisition of American Business Products (ABP) in February represented the lion's share of these sales. The ABP acquisition was the largest deal we have done to date. At the time we acquired it, ABP had sales of over $475 million.

So far this year, our commercial printing acquisitions are Braceland Brothers Printing in Philadelphia; Strathmore Press in Cherry Hill, NJ; and Craftsman Litho, in Waterbury, CT. Finally, we acquired a publicly held envelope manufacturing company in Canada: CML Industries.

Kashan: During our fiscal 2000-year, we acquired Media Printing, a full-web printer in Pompano, FL. This strategic acquisition was a good fit because it allowed us to produce full-web printing in a lower cost center and expand our product offerings.

PI: How would you characterize this year on the consolidation front, both from your company's perspective and the industry at large?

Norton: The year 2000 was a year in which it appeared there were very few acquisitions by consolidators or even strategic buyers, probably because: 1. anticipated acquisition prices in the prospective sellers' minds had reached unprecedented heights; 2. the financial markets viewed printing companies less than favorably; and 3. many of the most active consolidators missed their earnings projections, their stock prices took a beating, and then they began to focus on internal operations and the repayment of debt.

Davis: The latter part of 1999, and early part of 2000, saw lots of marketing dollars on Websites and Internet-type advertising as a result. Commercial printing volume was a little light during this period. Since the first of March, our business has been strong compared to the prior year as a result of this short period of soft business. Consolidation in the commercial printing industry has, perhaps, had somewhat of a lull, but I would expect good companies to continue making acquisitions—we certainly plan to.

We've been buying one company at a time and will continue doing that. We believe we have the most successful track record in the industry: sales growth, operating income percentage, earnings per share.

Thompson: The Mail-Well experience is, for the most part, typical of our industry. We were more cautious and measured in our approach to acquisitions in 2000. Our focus is, necessarily, on capturing the value from prior acquisitions, rather than simply acquiring for the sake of getting bigger. We continue to look internally to integrate the acquisitions we have made, and to begin to implement our cross-selling and national account initiatives. Overall, 2000 has been a year of the consolidators working to digest their acquisitions and to realize the operating synergies that are available as a result of their prior acquisitions.

Kashan: On the industry front, it certainly seems to have slowed. As for our company, this year's initiative was the strategic merger with IGI that we executed in March. Our thinking for the merger was that we wanted to create a diversified platform, strong footprint, in the largest print market in the United States.

We do not view ourselves as consolidators, but as integrators that strategically acquire complementary facilities and bring them into our manufacturing family. We are building a network that shares capacity, improves operating efficiencies and leverages purchasing power.

PI: How big of a factor has Wall Street played in the apparent slowing of consolidation?

Norton: Wall Street had a major impact because public printing company P/E ratios many times were less than the multiple that sellers desired for the sale of their businesses. Therefore, many acquisitions would be dilutive to the buyer's stockholders.

Davis: The fact that consolidators, including ourselves, had some rather robust projections to meet, and the fact that that we didn't make those projections—we missed them slightly—caused our stock price to drop. That had an impact on the pace of acquisition in the commercial printing industry.

Thompson: In my view, Wall Street played a significant role. However, so did the Federal Reserve. The increase in interest rates had a major impact on companies' bottom lines and that, in turn, affected stock prices negatively. Consolidation requires capital, and the twin hammers of lower stock prices and higher interest rates in many instances effectively eliminated access to the capital markets for many companies.

Without access to the capital markets, companies had to either rely on bank debt, which is not always a viable option, or rely on internally generated funds. In either instance, the raw material that fuels an industry consolidation was either greatly restricted or, in some instances, eliminated altogether. The natural result has been a dramatic slowdown in consolidation activity.

Kashan: We're a private company, so Wall Street has had little effect on us. However, as an industry, the financial deals executed over the last few years now need time to be integrated. It appears, most of these companies are focused on how to proceed strategically with the businesses that they have grouped together. We believe we have integrated our companies well and now have a strong platform. Futher, there are still M&A opportunities in the marketplace, but the key to successfully executing these deals lies in the client base, manufacturing facilities and the cultural fit.

PI: What were some of the biggest mistakes that have been made by industry consolidators?

Norton: Many industry consolidators bought companies at ever increasing multiples as if there was no tomorrow.

Davis: Any time you're in the acquisition business—growing the company—you have to do it very thoughtfully, very carefully, and you have to structure transactions so that both the seller and the buyer benefit. It can't be one-sided transactions. And it has to be a reasonable price and a reasonable expectation of future earnings. Some of my competitors in the consolidation business didn't have the experience in the industry that we have and, because of that, they made some mistakes.

Thompson: With the enormous benefit of hindsight, our biggest mistake was failing to anticipate the change in the rules. That is, we—and I include consolidators and the non-consolidator members of the printing industry—did not expect that the activity we were being rewarded for by Wall Street would suddenly be penalized.

Nor did we dream that Wall Street's view of our industry would change so radically and so quickly. We will adapt to this new set of rules and have, in fact, begun that process. At Mail-Well, we are taking advantage of the slowdown in acquisition activity to focus on running our businesses better and to emphasize the integration of our acquisitions. We look at this time as an opportunity to hone our operations, implement our purchasing programs, emphasize our cross-selling and national account program, and make strategic acquisitions.

Kashan: Printing is a very difficult business; you must have an understanding of your operations and your clients in order to successfully acquire companies and create a strong network. Managing multiple locations is a daunting task unless they are complementary and provide a strategic fit. We are focused on establishing meaningful improvements in operating results and developing a more responsive organization. We have significant sheetfed (12 six-color presses with coaters) and half-web capabilities in the metropolitan area, with sales topping the $160 million mark.

All our facilities are linked together, which allows us to utilize existing capacity more efficiently and be more competitive for our clients. Our success lies in technology that has enabled us to produce printed material faster, cheaper and better. Our VPN network puts all the company's resources at our clients' disposal. In particular, our Florida facility complements our product mix perfectly. Our clients are asking us to produce web work at very aggressive prices and one way to accomplish that is to prep jobs in the metro New York area and transfer files over high-speed lines to a cheaper, direct labor market. That's how we are meeting our clients' needs.

PI: What do you envision for consolidation over the next year or two?

Norton: It's apparent that the financial markets are looking at consolidators in all industries with more skepticism due to so many consolidation failures. Moreover, so long as financiers believe that there are much better financial returns achievable in other industries, the printing industry won't experience the acquisition activity that it experienced just a few years ago.

Davis: Some of the people who were driving consolidation may have a debt level now that won't allow them to make any acquisitions. The number of people who are actually acquiring companies is probably less than it was in the past. A lot of companies that were for sale in the last three or four years have been sold, so I think the pace of acquisitions might be a little slower in the future because there's not as many companies available for sale. The same forces that we've had driving consolidation are still here: technology, capital availability, requirement to invest in new equipment, and customers that want a national organization to service them from many locations.

Thompson: The fragmented nature of our industry begs for consolidation. If some of today's consolidators fall by the wayside, it is likely that their places will be taken by others. The level of consolidation activity for the next couple of years will likely be reduced significantly over that which we saw in 1999 and 2000. When a particular activity is not rewarded by the financial markets, that activity is either greatly reduced or foregone completely. Today, Wall Street is not paying for growth by acquisition.

What the markets want to see is debt levels being reduced, "same store" growth and the realization of operational synergies. The fragmented industry will still be fragmented in two years and we, the consolidators who make it through this, will be better able to capitalize on the market conditions and reward our shareholders in the new environment.

Kashan: Our focus is on growing organic sales. Any acquisition would have to be very complementary to our platform and of strategic importance for us to consider it. Our philosophy is focused on: how do we add value for our clients? We realize the contributing factors to our success are a strong operational/financial understanding of our business, great employees, strong customer relationships, and a willingness to embrace and integrate technology throughout our manufacturing process. We exist to serve our clients.