Printing Impression Special Article
– Harris DeWese
This is excerpted from the Executive Summary of the 2009 Compass Report.
Not surprisingly, M&A activity in the printing industry and among related support suppliers came to an abrupt halt in August of 2008. There were thirty-four deals completed among printers prior to August 31, 2008. Nine deals were reported for the first nine months among graphic arts suppliers, paper companies and related services. Only three deals were reported in the final quarter and six deals have occurred in the January 1 to June 30, 2009 period. These deals appear to be adjusted book value transactions versus multiples of EBITDA. This low level of M&A activity and the prevalence of distressed transactions is expected due to the worldwide economic recession.
M&A transactions disappeared due to the banks’ inability to loan money during the worldwide financial crisis and the resultant inability of buyers to finance acquisitions. Printing industry public company stocks declined an average of 80% and their painfully low public market EBITDA multiples meant they could not make accretive deals. Privately-held companies, likewise, were forced to look inward as print demand declined from print buyers suffering in the atrocious economy wacked budgets. Potential acquirers were consumed with cutting back to stabilize their companies. They were not looking out to grow by external development.
Meanwhile, bankruptcies, liquidations and plant closings were mounting faster than deals were declining. The Printing Industries of America (“PIA”) reported that the number of printing establishments declined by 2,311 or about the same number that has been lost each year for the past several years. PIA now reports 36,508 firms while others place the number closer to 30,000.
The components of any industry consolidation are liquidating bankruptcies (Chapter 7 or Chapter 11 liquidations), company liquidations (plant closings) and M&A transactions that result in reduced capacity.
Whatever the actual number of printing firms, Consolidation is occurring by far more from bankruptcies, liquidations and plant shutdowns than from mergers and acquisitions. M&A transactions in the printing industry rarely result in reduced cylinders or less capacity.
Number of Deals in the Printing Industry
Figure 1 Number of deals among printers with sales >$5.0 million
Note: The Compass Report began tracking supplier transactions in 2004. For consistency purposes, however, the transactions included herein are of printers and do not include suppliers.
The U.S. economy buoyed by the White House and Congressional stimulus packages is improving slowly with modest improvement on many fronts. As the economy improves, the pent up demand for sellers and buyers is beginning to emerge and we are experiencing greatly improved deal flow and more positive positions by buyers interested in growth by acquisition. These factors cause us to predict there will be between 25 and 30 deals completed in 2009. If the President or Congress hints an increase in the capital gains tax in the near term and depending on the date of execution, we could see a modest explosion in the number of deals for 2010.
Range of Multiples of EBITDA Paid for Printing Companies
Multiples of EBITDA declined as the housing/bank crisis began to emerge. The multiples ranged from a low of four times to a high slightly above five times. Most sellers with sound profitable companies were unwilling to sell at less than four times and elected to hold on for better times. Multiples became moot; however, as the year wore on since banks weren’t lending at any multiple and the publicly traded buyers multiples were less than four times.
Multiples will begin to edge up as the economy improves and the banks begin to lend again. There are numerous private equity firms with cash to invest and who “like” the printing industry so there is an opportunity for competition between strategic and financial buyers for desirable targets. A handful of financial buyers have actually identified specific printing segments as target and have embarked on a buy and build strategy.
There is no absence of sellers with mounting pent up desire for liquidity during this economic hiatus. There is no widespread desire for succession among owners’ children. Other owners age and suffer illness and wish to sell. Other owners tire of the enormous managerial demands of the job shop printing process and the intense price competition of some print segments. Others, wary of personal liability, postpone equipment purchases that require personal guaranties and elect to sell.
It is a mistake to generalize about the printing industry because it is comprised of many very different segments with entirely different microeconomics. Some segments are more attractive to buyers because of favorable capital structure, favorable competition, more predictable earnings, lower employee complements and so on. These segments, quite naturally, command higher multiples and inspire greater interest by financial and strategic buyers. Transactions for these specialized companies will dominate the action over the next two to four years. General commercial companies, the most populace of the printing segments will have difficulty finding buyers and obtaining the higher multiples.
The industry will have more success finding buyers if it ever begins to succeed from within by developing the experience and aptitude for management led management buyouts. These transactions require creativity and flexibility among sellers who have tended to say, “I want cash now” and may have to settle for some cash now and some seller financing. At least, the owner will have transitioned the company to loyal and younger employees likely to preserve and grow the firm.
The trauma of the financial crisis will pass and M&A activity will resume, but cautiously. Due diligence will be more diligent. Multiples will be negotiated more rigorously. Strategic fits will be closely analyzed. Many transactions through 2010 will be distressed such as Section 363 Chapter 11 deals and adjusted book value deals. We shouldn’t anticipate many mega deals among the PI400 over the next 24 months. The big companies will be preoccupied with repairing the damage to their income statements and balance sheets.
Finally, the U.S. print buying community will return to normalcy and decide how it intends to communicate most profitably with its markets and constituencies. Printing, as one of several media choices, offers great value and should learn to sell itself more effectively.
