Is It Time to Buy, Sell, or Hold? M&A Activity & the COVID Effect
Everything stopped — for a while. Amid the chaos of a worldwide pandemic, and along with the rise and fall recovery that is still our collective reality, printing industry mergers and acquisitions are back on track. According to those experts who specialize in M&A transactions, sales and purchases today are robust, though the experience of the past 18 months has adjusted perceptions and expectations for selling or buying printing businesses.
And while business today takes place in a changed world, the experts interviewed for this article maintain that the fundamental priorities are essentially the same. Sharing their firsthand experiences on today’s M&A playing field are: Mark Hahn, senior managing director at Graphic Arts Advisors; Paul Reilly, a partner at New Direction Partners; and Peter Schaefer, also a partner at New Direction Partners.
The Current State of Industry Activity
Given the state of the past 18 months, Hahn says, in general, M&A activity in the commercial printing segment has been steady, excepting March, April, and May of 2020. Deferred actions, he says, have largely been completed, and activity is taking place in all segments of the printing industry.
According to Hahn, the label manufacturing segment is currently “on fire,” a reality that is being driven by private equity roll-ups. As investors look for businesses in manufacturing, he says, packaging has become desirable — particularly in labels and flexible packaging. Hahn also expects activity to pick up in the folding carton segment.
Schaefer reports that “everything hit a brick wall” in early 2020, resulting in many M&A deals being put on hold. He says strategic buyers are back on track and showing strong interest. While companies saw top line declines during the height of the pandemic, Schaefer adds, the economic climate is still attractive, and interest rates remain low — great conditions for robust activity.
Speaking broadly about the printing industry, Reilly highlights variability in the amount to which certain sub-segments have come back from the pandemic. For instance, he points to the packaging segment as a current winner, while companies serving trade shows and live events have seen halting business and slow recovery. Two factors affecting M&A activity today, Reilly adds, are the end of PPP loans, which have served to bolster businesses, and concern over increases in the capital gains rate.
When asked whether buyers or sellers are seeking certain elements they might not have pre-COVID, Reilly reports that they do not. His colleague, Schaefer, says that while buyers are fundamentally looking for the same things, they also realize that businesses, and the world, are facing a risk that didn’t need consideration before. Regarding risk, Schaefer adds that one of the strongest factors for mitigating risk is a healthy balance sheet.
Hahn notes that post-COVID, “sellers have moderated their expectations a bit.” He says they are being more realistic and working to find deals that are mutually beneficial for both seller and buyer.
Convergence & Consolidation
Aside from expanding capacity, customer base, or market segments, one key reason many commercial printers have made purchases in recent years has been to gain capability. One example is those companies seeking to buy a wide-format graphics business. About this, Schaefer says that inkjet remains highly attractive to buyers, and that wide-format continues to be an attractive acquisition target for commercial printing companies.
Conversely, Hahn reports that, as the margins and equipment costs of wide-format have come down, so too has the interest in the wide-format segment. He contends the data indicates more “distressed” companies in that space, and that wide-format is showing its maturity. Valuable companies, Hahn adds, are those that hold robust value-adds, such as highly-competent installation crews.
Beyond interest in wide-format capabilities, Reilly is seeing strong interest in the label segment. But it is important for commercial printers to understand that the model is different: commercial shops sell primarily to marketers, while packaging is sold primarily to producers and manufacturers, he points out.
Hahn, similarly, sees commercial printing companies jumping into today’s robust packaging opportunities — particularly in the folding carton space — seeing what he refers to as “greener grass” in that area. He adds, however, that current folding carton producers are “doing just fine, and not waiting for commercial printers to eat their lunch.”
After being hit hard more than a decade ago by the 2008 recession, Schaefer notes that the direct mail segment has bounced back, and is now doing very well. One of the factors that is keeping this segment strong is interest in companies that can do both 1:1 and traditional outreach. Despite direct mail being less cost-effective than online marketing, “it continues to generate better results than other media,” he says.
According to Hahn, the growing presence of digital printing in the commercial sector has “blurred the lines between printing and direct mail concerns.”
Looking at the concept of convergence — the movement of print providers into other printing segments — Reilly says that as commercial printers move to become more customer-focused and full-service, they are looking at other segments and companies in a quest to serve all of the needs of their customers.
Hahn is also witnessing convergence between printing and mailing businesses. “Mailing companies are clearly becoming printing companies who manage data and vice versa,” he says.
Addressing convergence, Schaefer points out that for strategically focused companies, one of the strategies behind M&A is their desire to acquire what they do not have. They are looking for technologies and capabilities they can add to what they already do — along with the books of business of those businesses they acquire. He says the printing industry has become about “haves” and “have-nots”. “The haves”, Schaefer notes, “have invested in opportunities and technology. The have-nots,” he adds, “are those looking to sell.”
Is Now a Good Time to Buy or Sell a Business?
So, is late 2021 a buyer’s market or a seller’s market? Schaefer believes it’s both. Given that M&A activity has increased, as have purchase price multiples (though marginally), he thinks there is still a strong opportunity to acquire companies at competitive prices. Hahn agrees, stating that buyers are being rational and thoughtful, and that sellers have moderated their expectations. Reilly says that while the M&A market is always moving, he sees this time as being more of a seller’s market, evidenced by interest from private equity firms, low interest rates, and good valuations.
For those selling their companies, Hahn says one common mistake is the tendency to overvalue equipment, noting that digital printing equipment has a much shorter life span than analog presses. He adds that customer concentration is also a key consideration, and that having a customer that comprises more than 20% of overall business may give buyers pause.
Another potential mistake sellers must consider, according to Schaefer, is how a slower than normal recovery from the pandemic could change the terms of a deal, or at least the structure of it. This, among other factors, should encourage sellers to access experienced professionals who can lead them through the sales process, which can be both complex and emotionally fraught.
Addressing common buyer mistakes, Reilly notes the failure to do needed homework up-front. “Whatever strategy you have,” he says, “you need to put the resources into doing it right, and that the reasons for the purchase are actually happening.” Hahn notes buyers can benefit strongly from approaching a deal courteously and providing a well-thought-out and fair offer right out of the gate. Schaefer adds that, in some cases, buyers have learned from the mistakes of earlier deals that didn’t go well. He says that they then approach new deals from “a very smart place.”
From either a buyer or seller standpoint, Reilly notes that, for many companies, the 2020 calendar year performance may be viewed as an anomaly or a speed bump. Others may view it as a rickety bridge spanning the abyss between a strong 2019 and a strong 2021. Many companies today, he says, can demonstrate that 2021 activity is equal to or better than 2019.
Further, Reilly points out that the profound “dip” of 2020 represents the first recession where printing came back to where it was before. Assuming the exit of COVID and no recession, he sees strong demand in labels and packaging, and improving multiples.
Schaefer agrees that strong M&A activity “will continue for some period of time.” He notes that the printing industry is still very fragmented, and that fragmented industries tend to consolidate.
Hahn also believes M&A activity will continue to be robust, and sees lots of supply moving forward, particularly as an aging generation of business owners moves toward retirement.
All that said, it is a new world for a printing industry that is facing challenges to its supply chains, uncertainty regarding the length and severity of the COVID-19 pandemic, and profound labor supply challenges. Survival and success have new metrics, each of which can impact any company’s selling or purchasing plans.