Consolidation Activity Falters
A well-publicized stumble, integration complications, and intense Wall Street reactions slowed the pace of acquisitions this year in the printing industry.
By Lisa Cross, Business Editor -- graphic arts online, 12/1/2000
After several years of aggressive acquisition activity, printing industry consolidation came to a screeching halt in 2000.
According to Compass Capital Partners, a Radnor, Pa.-based investment banking and consulting firm that specializes in the printing industry, the number of acquisition deals plummeted from 131 transactions in 1999 to about 50 deals this year. Compass Capital publishes a yearly report that tracks acquisition transactions involving printing firms with sales revenues of $5 million or more located in the continental United States.
Many industry executives say that a large part of the decline in industry acquisition activity can be attributed to the drop in stock prices of the publicly held printing firms that were leading the charge to consolidate the printing industry. These firms sought to grow through aggressive acquisition, mainly in the sheetfed commercial market.
Ripeness rationale
The sheetfed commercial market was and still is an attractive segment ripe for consolidation because it (a) contains a lot of profitable companies, (b) is plagued by overcapacity and poor equipment utilization, (c) is not dominated by any single company or group, and (d) requires companies to keep investing capital to remain competitive.
Initially, Wall Street rewarded printing consolidators that had active acquisition strategies, which in turn fueled more acquisitions.
When the stock prices of the publicly held printing industry consolidators were up, their earnings were assessed at a higher value than private firms. This difference in the value of the public versus private firms' earnings provided an incentive for the public firms to purchase. Here's an example to illustrate this point: when Public Printer, with earnings valued at $20, buys Private Printer, with earnings valued at $10, it immediately gains $10 in value from the purchase alone.
"These types of transactions weren't really adding value to the specific business itself; rather, it was a numbers game and Wall Street figured that out," explains Michael Cunningham, president of Cunningham Graphics International, Inc., Jersey City, N.J.
Acquirer acquired
Cunningham Graphics, a commercial and financial printer, was an aggressive, publicly held purchaser of printing companies that was itself acquired in May by publicly held Automatic Data Processing, Inc., a Roseland, N.J.-based provider of computerized transaction processing, data communications, and information services with over $6 billion in revenues.
Also, according to Michael Cunningham and other industry insiders, many of the publicly held consolidators were having difficulty integrating the companies they purchased. As a result, these firms didn't make their earnings targets and Wall Street took punitive action.
Most industry analysts believe that the public capital markets are punishing the printing industry consolidators at least in part because of the failure of Master Graphics, Inc., Cordova, Tenn., which filed for Chapter 11 bankruptcy protection in July.
Compounding the problem is the fact that Wall Street investors are assigning lower values to all "old economy" or "bricks and mortar" firms.
A black eye
"We believe that Wall Street's perception that commercial printing has a black eye has resulted entirely from the misadventures of a handful of public companies-the so-called consolidators," explains Harris M. DeWese, a principal of Compass Capital Partners. "For example, one company, Master Graphics, acquired some 16 commercial printing companies between 1997 and 1999 before its losses led to loan defaults and forced lenders to seek relief. From the outset, the leadership of this company was consumed with building critical mass at any price and then failed to manage what had been acquired."
DeWese continues, "The two most active consolidators, Consolidated Graphics and Mail-Well, have been punished severely for missing earnings expectations, and consequently carry price-to-earnings ratios well below those carried by the publicly held printers, such as Wallace Computer Services and Quebecor World, which are perceived by Wall Street as operators, not consolidators."
Owners' expectations hit
At the same time, individual printing company owners interested in selling their businesses have had a rude awaking recently as to what their firm is worth. Many would-be sellers had had high expectations because, when consolidation was in full swing, many stories were circulating about the hearty multiples that some sellers were fetching.
But that was when Wall Street rewarded consolidation.
"A few years ago you might have been able to buy a company for 5.0 to 6.0 times its cash flow, but now it's more like 4.5 to 5.25, so owners are sitting back and saying 'I don't want to sell at this price,' even though it's a fair market price," notes Kevin Howley. Howley is chief financial officer of Kelmscott Communications, a privately held San Francisco-based printing industry consolidator that at present has 19 companies in its network and $210 million in sales (expected to exceed $350 million in the next quarter, based on letters of intent in hand, says Howley).
One more factor putting the brakes on acquisition activity, in Howley's view, is the availability of debt financing. He explains, "The Federal Reserve has had an impact here. Alan Greenspan tightened the reserve requirements for the banks, which prompted the banks to be more selective in the deals they opt to finance."
M & A may remain strong
While consolidation activity appears to be taking a hiatus, it is far from over, according to a recent futures study released by the Printing Industries of America, Alexandria, Va.
The group's recently released Vision 21 report states, "While the number of printing industry mergers and acquisitions will diminish from previous years, they will still remain strong as a whole.
While the economy is tightening, interest rates are still relatively low and the economy is still growing strongly. The potential for more mega-deals among large firms means that the level of total sales values acquired and consideration paid to purchase printing firm could remain high. The focus on consolidation will increasingly be on operational issues rather than financial."
Adds Jeremy Roberts, director of corporate finance and investment relations for Quebecor World, Montreal, "Long term, there will be consolidation opportunities throughout the North American market. Printing is a highly fragmented industry and there are still many industry opportunities for a consolidator like us."
Roberts says that his firm has taken a break from acquisitions for the past year, following the acquisition of printing giant World Color Press, a publication printer with annual sales close to $2.4 billion.
He says that the company is refraining from purchasing any other companies until it reduces some of the debt incurred from that transaction, which made Quebecor World the largest printing company in North America based on revenues of $6.5 billion.
Search for value
"The aggressive merger activity will return," says Gerald F. Mahoney, chairman and chief executive of Mail-Well, an aggressive consolidator based Englewood, Colo. that booked sales of approximately $2.2 billion in the last year. "But we need to wait until many of our stocks get back up. Eventually Wall Street will treat us better. I don't expect any big run-ups in our stock prices in the near future, but eventually people will look for value and invest in printing industry stocks again when growth slows down in some of the other industries."
Mail-Well's plan from its founding was to become an active acquirer of companies. The company began operations six years ago with the acquisition of 17 envelope plants from Georgia-Pacific; sales at that time were a mere $260 million.
Mahoney is quick to point out that his firm hasn't stopped making acquisitions; it has just clearly slowed down. He reports, "We are focused on improving operations and driving down debt. This year we made one large acquisition, American Business Products, which was over $300 million, and four or five smaller deals. Before the year is over, we will purchase two or three smaller companies."
Deal-fueling factors
Four key factors have and will continue to fuel acquisition activity in the printing industry, says John E. Hyde, managing partner and the founder of Rampart Financial Group, Trumbull, Conn. Here are the main reasons that big companies buy other companies, along with Hyde's comments:
- Acquiring sales to fill plant capacity. "These types of acquisitions are fueled by industry fundamentals as opposed to stock market movements," says Hyde. "Overcapacity, changing technology, and difficulties in getting new accounts are underlying factors."
- Acquiring capabilities that otherwise are hard to build on their own.
- Expanding market presence by acquiring a platform in a new region.
- Buying earnings to build the value of the acquirer's company.
"Acquisition activity among private companies looking to acquire sales, expand their market presence, or acquire capabilities is still high. There's a general perception that transactions have slowed down substantially, but we are really busy and believe there is still a lot of activity going on," Hyde concludes.
