Industry M&A Activity : Deals Are in Full Bloom

The calendar tells us that it is May, a time of renewal and blossoming. Spring always offers optimism, a reminder that what has been cold and hidden for too long can now be basked in warmth and resplendent in full flower.
That optimism carries over to the economy, the great X factor in the printing industry. A more favorable economy means greater marketing budget spend for clients and greater availability of low-hanging fruit for printers. And, from a mergers and acquisitions (M&A) standpoint, there are many ramifications.

For those printers in some level of distress, who may or may not be experiencing an uptick in orders, this may be an opportune time to cash out as opposed to doubling down in an industry that seems to be banking more on digital than offset presses, even though digital printing still represents a tiny fraction of the total number of printed pages. Granted, the initial financial outlay for digital gear may be less than for traditional iron, but can shorter (and more frequent) runs and smaller margins sustain a traditional offset shop? It may be better to join an organization that can complement your own through expanded offerings, with the aggregated firm better serving the client lists of each company.

Some may see the economic atmosphere as an encouraging sign to follow through on long-delayed capex improvements. Not everyone shares that view; to some, a down economy is an ideal time to add gear and get a better jump on those competitors who remained in a holding pattern. Likewise, those printers who curled up in a ball during the Great Recession may have already done irreparable harm with their inaction.

And, in instances where the equipment is too old, the facility’s lease is up, the firm is fully leveraged and unprofitable, the last bastion of value lies in the client roster. But that’s going on the assumption that valuable customers have not already been lost. What remains—a quasi-decent customer list, perhaps a somewhat talented salesperson, maybe some folding equipment of value—translates into the ever-popular and growing trend toward asset sales.

A look at the news pages of Printing Impressions makes one thing abundantly clear: the M&A machine is running wide open at the moment. Major players are buying major players, mid-sized firms are merging to offer more products and services, smaller printers are aligning in order to survive, and companies of all statures are picking the carcasses of firms that cannot survive under any circumstances.

Here are 10 of the more significant deals completed during a four-month stretch carrying into the first quarter of 2012:

• Quad/Graphics makes a splash with the acquisition of marquee Dallas firm Williamson Printing.
• Ann Arbor, MI, book printers Edwards Brothers and Malloy merge, creating the sixth-largest book manufacturer.
• Illinois-based TouchPoint Print Solutions acquires Ginny’s Printing of Austin, TX.
• Pemcor Printing of Lancaster, PA, adds a pair of Keystone State firms in the $5 million to $6 million range in Typecraft Press and Laser Imaging Systems.
• A pair of Minneapolis firms joined forces, with Imagine! Print Solutions picking up DigiGraphics.
• Charlotte, NC-based Classic Graphics nets the assets of Harperprints Inc., of Henderson, NC.
• Ovation Graphics, Fort Worth, TX, buys virtually all of the assets of Dallas-based Branch-Smith Printing.
• Colorfx, Des Moines, IA, tacks on Demco Printing, creating an $85 million performer.
• Rohrer Corp., of Wadsworth, OH, nets Hogue Printing Solutions of Mesa, AZ.
• Dodd Communications and Franklin Communications combine their Florida operations.

What can we take away from some of these deals? According to John Hyde, senior vice president of the National Association for Printing Leadership (NAPL) and head of NAPL’s Mergers and Acquisitions Advisory Team, M&A is a highly inclusive phenomenon at the moment. That isn’t likely to change soon, either.

“Companies of all sizes are pursuing M&A,” he says. “Companies under $2 million in sales are increasingly interested in becoming part of a company with greater capabilities. Owners are facing the reality that most strategic buyers aren’t interested in taking on a going concern—only customers.”

Judging printers by the types of vertical markets in which they serve, Hyde feels those who address the pharmacy and health care markets are in advantageous positions. Conversely, companies that thrive on state and federal government printing—perceived as “printing without a soul” because of the bid-only, relationship-less environment—or cyclical work such as political printing, can be a difficult sell, according to Hyde. It’s not to say that government and political work aren’t profitable or sustainable, but they are lacking in certainty from a buyer’s perspective.

With the tradition of family-owned printing businesses being passed down from generation to generation waning, Hyde anticipates many Baby Boomers unloading their modest, but profitable, shops in the coming years. It is not a knock on printing or a reflection of its future per se, but the reality is that the children of printing shop owners are opting to go in other career directions.

“As these owners contemplate retirement and, given the challenges of further reinvestment, they are more open to a succession plan involving infrastructure liquidation and transfer of customer relationships to a strategic acquirer,” he notes. “This dynamic creates opportunities for larger companies to grow by acquisition. This is more prevalent than I’ve seen in recent years.”

The traditional web and sheetfed printers remain under pressure, a reality reflected in many of the mergers and bankruptcies that are taking place, notes Bob Cronin, managing partner of The Open Approach, which also provides M&A consultation to the industry. By the same token, he feels there are substantial opportunities for firms that offer, for example, an effective variable component, a complementary marketing services function or an innovative IT-based advantage. Labels and packaging also carry significant interest, according to Cronin.

“The primary driver behind deals is still customer demand for a company’s particular products, services and value-adds,” Cronin states. “No matter if it’s a strategic acquirer, investor or private equity firm, they all want to know whether the company in question can thrive, or has the opportunity to do so. Positioning is key, which is what makes a good advisor valuable.”

Cronin expects asset sales to account for a lion’s share of the deals that will take place during the next 12 months. He believes the market has not rebounded to a level that would encourage rollups of medium-sized performers. Asset purchases are the ideal avenue toward filling out existing capacity.

Like Hyde, Cronin feels the best candidates for acquisition are those printers who serve the pharmaceutical and health care verticals. Having equipment that speaks to packaging and plastics can only strengthen your cause, he adds. On the other end of the spectrum, he notes that many companies wait too long to do a transaction, eliminating too many options.

Looking ahead, deal structure is a major variable in the M&A game, with financing a tough nut to crack in dealing with a banking community that does not look upon printing favorably. The road to closing remains a rocky one, according to Cronin.

“Many deals are being done as recapitalizations, earnouts, owner financing or another creative structure,” he says. “For companies with significant banking issues, it is a big unknown as to who controls the sell decision—is it the owner or the bank? Some owners start making calls to competitors and suppliers about selling their company without enough knowledge of the process, destroying their image and value before they even get started. Thus, we have a greater number of issues these days before we reach a closing.”

From the printer side, Jim Cohen—executive vice president of mergers and acquisitions at Houston-based Consolidated Graphics (CGX)—feels overall activity during the past 12 months has declined. Many of the businesses that survived the recession are hanging on and hoping to improve their financial results before trying to sell, Cohen notes, while others have not recalibrated their valuation expectations to meet post-recession realities. A third group, the owners of distressed companies, are either holding off because their banks have thrown them a lifeline or they have thrown in the towel without fully exploring opportunities to sell.

“We have saved hundreds of jobs with some of the distressed acquisitions we’ve made over the last two years, and the owners have been rescued from financial calamity,” he states. “Many owners think that if they’re losing money, there is no option other than to shut down. This is not necessarily the case. We have a lot of experience working with lenders to structure acquisitions that save companies and jobs.

“It is true that some companies are too far gone and cannot be saved; the ‘walking dead.’ We’ve looked at a lot of those over the last year,” Cohen adds. “These are the companies that will shut down with greater frequency over the next couple of years, or merge with another distressed printer.”

As with Cronin and Hyde, Cohen believes the next 12 months will see a diverse mixture of acquisitions and, sadly, the continued trend of contraction by those unable to improve their financial results or secure dance partners. “The contraction will continue for at least another couple of years as lenders wake up to the reality that some problems will not get better with time,” he says, and fewer distressed deals may occur as companies decide the risk is too great for the rather limited upside.

Who are the most attractive acquisition candidates? Cohen sees those firms that have effectively managed their head counts and invested in technology and print-on-demand solutions as heading the list of favorable targets, as well as those companies that are truly innovative “solutions sellers” or marketing service providers. Commodity print order takers, as well as companies that rely heavily on work from print management concerns or brokers, will become more vulnerable as business becomes more solutions oriented and digital, according to Cohen.

“Companies involved in variable printing with digital technology solutions will grow at much higher rates than traditional offset printers and will be more attractive acquisition candidates,” Cohen concludes. “The reality, however, is that very few of these companies exist, at least today.”

Cohen cites revenue, earnings, a strong balance sheet and the economy as playing the biggest roles in successful transactions. But technology—what a prospect has going on under the hood—can spell the difference between a handshake and a headache. PI