State of M&A Market for the Commercial Printing Industry

If the engine of U.S. economy is consumer spending, its turbocharger is mergers and acquisitions (M&As) among businesses of all types.

Wolters Kluwer, a financial consulting firm, describes an “unprecedented” U.S. M&A market in 2021 with a record $2.9 trillion in transactions, up 55% from $1.9 trillion in 2020. Tracking a 50% increase in the value of industrial manufacturing M&As from 2020 to 2021, PwC (PricewaterhouseCoopers) predicts that M&A dealmaking among manufacturers will continue strong this year.

Somewhere in the middle of this trillion-dollar
turnover is the commercial printing industry — a mature manufacturing sector that is naturally prone to consolidation as many of the companies within it come to the ends of their life cycles. This creates opportunities for other companies to grow by acquiring these firms instead of trying to eke out further gains through organic growth — often an uphill struggle for providers in industries as competitive as commercial printing.

This also suggests that, at some point, every commercial printing business will find itself either a candidate for acquisition or a buyer of other businesses it can integrate to create new value. M&A advisors to the commercial printing industry agree that preparing for either one of these roles should be part of every owner’s long-term strategic thinking.

For Some, No More ‘Treading Water’

Although M&A opportunities continue to arise in commercial printing, the pace of activity is considerably slower than in labels and packaging — the M&A market where the most lucrative deals are taking place. Some commercial printers also tend to be less favorably positioned for acquisition because of what their segment has experienced in recent years.

According to Mark Hahn, of Graphic Arts Advisors, those that suffered losses during COVID-19 would have been in severe financial distress without the financial lifelines of the federal Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC) to sustain them.

“The federal programs gave them the cash lifeblood to at least continue to tread water,” Hahn says. “Were it not for those funds, they probably wouldn’t have made it through this time period. So now they’re thinking about an exit.”

Hahn thinks this pressure will create more opportunities for consolidation within the segment. A portion of those, he notes, “will be driven due to financial challenges.”

This isn’t to suggest that all commercial printing firms are at a disadvantage in terms of M&A deals. “Certain pockets within commercial printing are seeing some relatively active markets right now,” observes R. Trevor Hulett, of R.L. Hulett & Co., citing “a nice flow” of M&A activity in printing for direct mail and marketing.

The more traditional forms, on the other hand, “tend to be a bit more difficult from a pricing standpoint, given macro trends in the industry of things continuing to evolve and convert to digital.”

Paul Reilly, of New Direction Partners, calls the M&A market “better than average” for commercial printers, but his colleague and fellow partner Peter Schaefer adds a qualifier.

“There’s less interest in a general commercial printer than there is in a specialized printer like a direct mail printer or a book printer right now, because those two segments are doing really well,” Schaefer says. “A general commercial printer is more often than not struggling to differentiate itself with its customers. And it’s not as attractive to buyers as the specialized printers.”

Cash Out, Move On

A number of forces have converged in the momentum behind the M&As now taking place in the commercial print segment. The primary one, believes Gerald Whitlow, of Horizons Business Group, is the desire of the selling owners.

“We see companies with owners wanting to retire. There’s no succession plan within their business, no family members, nobody within the company to take it over,” Whitlow says. “The owner wants to retire, cash out, and go on with their life. In every deal we’re currently working on, the owner wants to retire.”

Hahn says the same impulse is felt by owners who have done so well that their children can’t afford to buy the company. The owners want to monetize their equity, but the next generation often don’t have the wherewithal to make it happen. Those who have steered their companies to growth through recessions, pandemics, and other adversities may no longer have the energy or the desire to remain at the helm.

“There’s a certain amount of owner fatigue through the up-and-down cycles that will — now that we’re returning to normal — start to play out as a big driver of M&As,” Hahn predicts.

The dynamics of the industry as a whole also make more consolidation inevitable, according to Hulett.

“You’ve got a lot of capacity out there that is more efficient when rolled up,” he says. “You’ve also got an abundance of capital that’s been raised over the last three to five years and is looking for ways to generate returns. Some areas in printing and packaging continue to be fragmented and tend to be a good source for investment for private equity and for strategic buyers.”

Financial vs. Strategic Buyers

As financially motivated investors, private equity (PE) buyers use a mix of borrowed capital and funds of their own to acquire companies that they believe will generate a substantial return on investment over time, typically by reselling the acquired businesses. Strategic buyers are, in most cases, printing companies seeking to grow their customer base, geographic footprint, or product portfolio by acquiring other printing companies.

The interest a buyer takes in a given company depends which of the two types the buyer is, Schaefer observes.

“Financial buyers are going to be excited about consolidation opportunities and acquisitions in which they can increase the critical mass, and get synergies and cost savings to make themselves more profitable,” he says. “Strategic acquirers are attracted to that, but they’re also attracted to having different locations and distribution opportunities.”

Something else that financial investors like about printing firms is that they can be more economical for dealmaking than other types of businesses.

Hulett explains that when a multiple of EBITDA (earnings before interest, taxation, depreciation, and amortization) is the basis of valuation for printing companies, “you’re probably looking at multiples that could be viewed as attractive or compelling as opposed to high-tech software or pure services plays that tend to be pretty pricey.”

Unlike more modestly valued printing businesses, these expensive investment targets “don’t fit certain funds’ profiles in terms of where they like to play on pricing,” Hulett adds.

Time for Second Thoughts?

Private equity investors used to shun the printing industry, but no longer — their participation has driven a strong wave of M&A activity within it in recent years. But now, as inflation persists, interest rates rise, the risk of recession looms, and the stock market turns bearish, the question is whether PE investors’ keenness for commercial printing companies could begin to fade.

Hahn sees private equity’s interest in general commercial printing as limited to begin with. “Underlining the ‘general,’” he says. “Where private equity gets involved with commercial printing, there’s usually either distress or some type of specialty. There are some exceptions, but the real private equity interest is significantly higher in packaging by far.”

Hulett believes that if the economic picture grows murkier, there could be contraction in the pricing that PE investors are willing to offer commercial printers. He explains that the higher cost of capital causes lenders to raise interest rates and makes them more cautious
in underwriting transactions. As a result, PE funds borrowing from the lenders may have to choose between lowering the offering price or accepting a lower return on their investment.

“We’re starting to see the front end of a course correction with inflation and interest rates rising, and some uncertainty in terms of a potential recession ahead,” Hulett says. This is why he believes “we probably saw a peak in terms of M&A pricing in the early fourth quarter of last year.”

Reilly agrees that rising interest rates likely will increase the cost of capital to PE companies, and that this could very well change prices. “But, I don’t think it’s going to change the demand,” he emphasizes.

“We have to be realistic and say that if we go into a recession, it’s got to impact the interest of financial buyers,” Schaefer acknowledges. But, he’s also convinced that their underlying enthusiasm for printing won’t be shaken by bad economic news.

“I don’t think it will disappear at all, and I don’t necessarily think it will diminish with strategic buyers,” he says. “There are a lot of financial buyers now that are strategics because of all the acquisitions that they’ve done. There are just a whole lot more buyers today than we’ve seen in decades.”

In Whitlow’s opinion, financial turmoil could even work to the industry’s advantage in terms of M&As. He explains that as private equity seeks safe havens for its money outside the volatile stock market, a printing company offering a smaller, but more predictable, return becomes that much more attractive as an investment opportunity.

Private Equity Prerequisite: Business Sales Growth

Owners of printing companies being courted for acquisition by private equity investors need some insight into how these sharp-eyed financiers think and do business. Hahn notes, for example, that an owner selling to private equity should expect the due diligence process to be far more rigorous than what he or she would undergo in a strategic acquisition by another printer.

“A private equity fund is really focused on the financials,” he says. “In general, the private equity funds are looking for growth potential, whereas another printing company may just be happy to have your customers. A PE firm is going to look for growth potential in your business model.”

Whitlow advises owners selling to private equity that they may have to choose between two methods of compensation: full payment at closing, or partial payment followed by several years of additional payouts based on the company’s performance over that time. He says the one-time “cash and walk away” offer usually will be less than the cumulative payment to be earned throughout the extended period of the agreement.

When it comes to setting the terms of an acquisition, Hulett points out, “a lot depends on who the private equity fund is. Some tend to be fairly collaborative and focused on growth, which could very much inure to the benefit of the family founders. Other private equity firms are governed by the numbers, and that tends to drive different decisions that can adversely impact the culture of family-owned
businesses.”

This can happen because private equity firms are very
EBITDA-focused, whereas family members’ decisions aren’t always based on driving the highest possible financial performance. On the other hand, Hulett observes, private equity investment can bring new energy and direction to companies whose owners have reached a point where they want to step back from the stress and the risks that come with keeping the business growing.

“That can really drive some opportunities for people to get involved in other types of work or get exposure in other areas of career advancement,” he says.

Being the ‘Platform’

A common strategy of PE investors is to acquire one company as a “platform” to which it adds other acquired companies until it has achieved the capabilities and the economies of scale that it wants. Reilly says that for an owner entering into a new private equity venture as the initial acquisition, “a big positive is that your company becomes the platform company. Your name is on the board. Your culture, the way you do things, gets spread to others.”

PE investors can be supportive in other ways. Schaefer tells the story of a New Direction Partners selling client who had second thoughts about buying a new piece of production equipment because of the debt that would have to be paid down at closing.

The private equity buyer, Schaefer says, “gave just the most passionate explanation” about why buying the equipment and taking on the debt would be to the seller’s advantage in the long run.

“If you are improving your EBITDA by buying equipment, you’re going to almost certainly get more in proceeds than the purchase price of that investment,” Schaefer explains. “Private equity buyers are often more open to capital expenditure than strategic buyers.”

The Paper Shortage Question

A printing industry phenomenon that no seller, buyer, or M&A expert could have foretold is the extraordinary tightness of the current market for printing papers. It remains to be seen whether this profit-impacting disruption of the industry’s most essential supply chain will change the pace of commercial printing M&As.

Hahn thinks that the paper shortage is just now starting to impact M&A activity. “We are talking to owners every day who are turning away jobs because they cannot get paper,” he says. “There are printers who are definitely going to experience a decline in revenues because they cannot get the paper.”

Protracted shortages could change some owners’ minds about their long-term plans, according to Hahn. “I’ve had people say to me, ‘If paper continues to be tight, I don’t know that this is a good business to be in.’ They say they can’t believe that the biggest issue they have is getting materials.”

Hulett notes that when paper price increases put pressure on operating margins, it becomes harder for owners to command the selling prices they would wish to receive. But, it isn’t just the rising cost of paper that makes a printing business more difficult to valuate and sell.

Freight costs, he points out, “have gone up significantly, not to mention the labor challenges that people are having. Across the board, input, labor, costs of good sold, everything is going up, which is making it tougher to keep pace with increasing prices to customers.”

Are We Punch-Drunk Yet?

As Whitlow reflects, “It’s just been one punch after another for the last 15 to 20 years. As a business owner, it seems the times of smooth sailing are like ancient memories in the 2000s and the 1990s.”

But, the threat posed by paper shortages, while serious, shouldn’t be overstated. “It’s not only the printing industry that’s suffering,” Schaefer comments. “Just about every industry is suffering some type of raw material shortage. I don’t think we should completely minimize it, but we haven’t seen it diminish M&A activity at all.”

Reilly, moreover, suggests that for some printers, the pressure that the rising cost of paper puts on their pricing structures hasn’t altogether been a bad thing.

Material costs eventually have to be passed through, and some of the customers who push back against the increases may be the same ones that the provider needs to gently push out. “You clearly have commercial printers using the opportunity to adjust their customer base where they’re servicing the people they want to service and walking away from those that they don’t want,” Reilly observes.

They Know What They Like

There is broad agreement among M&A advisors about the traits that buyers find attractive in the commercial printing businesses they scout as acquisition targets.

Whitlow says longevity, stability, and the client list are what appeal most to strategic acquirers, who also like opportunities to offer the seller’s customers products and services that the seller doesn’t currently provide. For financial investors such as PE firms, “it all comes down to the EBIDTA calculation.”

According to Hulett, the main attractions for buyers are value-adding products and services, solid profits, revenue growth, and investments in digital printing and other advanced technologies that differentiate the company from competitors. All of those things feed into a more desirable target with a higher EBITDA margin, he says.

He also believes that many private equity buyers see an EBITDA margin of 10% as a “line of demarcation” between businesses they tend to buy and those they tend to pass up. He says being underneath it “doesn’t mean an automatic no, but the further south of 10% you are points to a commodity type of business that just makes it more difficult to sell, and less compelling” to a PE investor.

“Growth, growth, growth, growth, and growth” is Schaefer’s formula for successful selling to M&A buyers who can never get enough of it. He also draws a sharp distinction between companies New Direction Partners categorizes as “haves” and “have nots.”

Those that grow as “haves,” he explains, do so by specializing their products and services, embracing advanced technologies, and focusing on customer retention. “Have nots” stagnate or decline as commodity producers clinging to business models that no longer serve them well.

Graphic Arts Advisors uses a set of benchmarks it calls “14 Keys That Drive Value” in consultation with its clients. Hahn says the keys fall within three main categories: financial performance, customers and markets served, and quality of management.

Financial performance emphasizes positive results in EBITDA, net income, and other business metrics.

Under the heading of customers and markets served, the main expectation is a diversified, non-concentrated customer base across a spectrum of growing industries and market segments.

Who’ll Pick Up the Torch?

According to Hahn, one of the most essential ingredients of quality management is succession planning.

As he explains, “The owner who brags that they do everything and comes in at 6 a.m. and leaves at 7 p.m. is not necessarily a good candidate for an acquisition, because that person does too much and now, they want to retire. So having that good middle management structure ready to step up when the owner retires or leaves is critical.”

Hulett agrees that much depends on the management team and on who owns the relationships with the customers. “If the family founders are wearing a bunch of hats, and a lot of those longstanding relationships are fully vested with the owner/founders, it makes it a more difficult transition to a buyer,” he says.

“So they tend to underwrite more risk, which leads to a lower multiple. I would encourage owner/founders to pass the torch on and transition the more key customer relationships to their top salespeople or account manager.”

Sweet Spot for Sellers

In many ways, the upper hand in the marketplace for commercial printing M&As belongs to sellers.

Buyers, both strategic and financial, are abundant. The investment capital that buyers need to finance acquisitions is available to them from banks and other lenders at interest rates that remain historically low. And, nearly every commercial printing company has something that the right buyer will want, even if most of the value lies in the seller’s account list.

Hahn notes that what selling owners should do next “really comes down to why they want to sell. Have they been diagnosed with an illness? Are they very successful, and it’s time to retire? Is there a spouse saying it’s time to retire? Are they financially distressed? Has their equipment reached the end of its life and they don’t want to reinvest?

“Our advice is going to vary based on why they’re calling us to talk about selling. We will help people figure out the best response to their situation, plan an exit strategy, identify prospective buyers, and vet the opportunities,” he says.

No matter what drives the decision to sell, Schaefer says, “think twice about deciding to wait until next year over proceeding now.” He explains that selling owners should anticipate six months worth of work, at a minimum, to negotiate and close the transaction.

Reilly adds that with a recession possibly ahead, acting without delay is especially advisable for commercial printers and other segments of the industry that have tended to suffer in previous downturns.

One way to start preparing financially, advises Hulett, is to identify and reduce sales concentration in the customer base.

“If you look at your revenue and you see 20% or more is from your top customer, I would encourage owners to think about either going out and trying to find some new customers or maybe looking at acquisitions themselves to diversify their customer base,” he says. He also recommends examining the company’s EBITDA margin and, if it needs improvement, upgrading equipment or broadening capabilities before putting the business on the market.

Whitlow reminds selling owners that at all times, they should be focusing on cutting costs and maximizing their net profit margins. “When you sell your company, you need to show the highest profit possible,” he says. “So, make the decisions that are necessary to increase your net profit.

How to Buy Smart

Owners of commercial printing companies who set out to acquire other commercial printing companies should begin by forming a clear strategy of what they want to accomplish, says Hahn. “Is your goal geographic? In the commercial printing business, we find that most players are thinking regionally, whereas in the packaging business, a lot of players are thinking nationally. There’s a big difference between those.”

Hulett’s advice to prospective buyers is to “look for pockets where the markets are growing, where there are differentiated, higher-margin types of products and services to be performed. Maybe they’ve got capacity that could be further leveraged either geographically or into some new end markets. Look at the end markets, and look to diversify.”

“Always be on the prowl for a tuck-in opportunity because it makes so much sense economically,” Schaefer says, referring to the type of acquisition in which the seller’s customer list is what the buyer principally desires. “Make sure lending for transactions and a smart acquisition still creates value for all the stakeholders: the owners, the employees, and the customers.”

Finally, advises Whitlow, keep in mind how much the success of the acquisition depends on what happens in the immediate aftermath of the sale.

“Focus on the book of business that you’re acquiring,” he says. “Focus on those new clients. Give them good service, and be prepared for the increase in business activity.”