New Era Of Consolidation
Consolidation is back in the commercial printing industry. This could impact in-plants, who rely on these firms to handle a portion of their work.
by ERIK CAGLE
Who can forget 1998 and 1999? Those were easily the salad days of merger and acquisition activity in the commercial printing industry.
The dotcom craze was sweeping the nation, with venture capitalists seeking new avenues into printing. Wall Street coveted the printing industry, and a wave of consolidators embarked on the IPO-and-roll-up philosophy.
When Quebecor merged with World Color, eyes bulged as if witnessing the finale of a fireworks display.
An omen, perhaps...
A sigh of relief was let loose when January 1, 2000, passed without computer chips causing worldwide havoc. But the economy's circuitry had begun to smoke and fizzle in the fall of that year.
The industry followed suit as 2001 turned ledger books red. Dotcoms disappeared, leaving behind only customer lists to be scavenged. A national recession brought massive layoffs and plant closings. A number of consolidator models crumbled into bankruptcy.
M&A was DOA.
But a new dawn is breaking. Already there are signs that some of the biggest players in consolidation—those who remain—are mobilizing.
Strategic M&A On The Way
"We believe M&A activity will absolutely accelerate during the course of the year, but mostly in a strategic context," says Gregg Feinstein, partner with Berenson Minella, which offers investment banking services to the commercial printing industry. "The days of buying sheetfed printing companies as part of a 'roll-up' strategy preceding an IPO will not come back any time soon.
"What you will see are many of the traditional buyers coming back into the marketplace along with some new players, all buying assets that add something operationally to their businesses. They will be pursuing deals that accomplish a strategic objective for them and add scale to their operations. This could, for example, involve a product extension to assist in 'cross-selling' or a geographic fit, which fills a need in the markets they serve."
Consolidation in the commercial printing world may create opportunities for in-plants.
"Oftentimes we experience an increase in inquiries, and subsequently customer base, resulting from a local merger of printing companies," notes Joe Morin, manager of production printing at Colorado Spring School District No. 11. "These are individuals who were content until their established relationship was threatened, causing them to investigate alternatives."
Other in-plants say they aren't affected by consolidation. Allstate's Commercial Print Division, in Wheeling, Ill., insources a lot of work from outside Allstate.
"There are still lots of buyouts, lots of doors closing," acknowledges Jerry Grouzard, print operations manager. "But we're able to maintain our commercial revenue because we're not dependent on it. Our livelihood isn't directly tied to market forces because we have a primary customer, Allstate, who gives us 90 percent of our business."
Feinstein believes larger transactions will transpire from the likes of Moore and Quebecor World.
"I would expect Moore to replicate the series of successful acquisitions that Bob (Burton) and members of his team pursued at World Color in the mid-1990s," Feinstein says.
Quebecor World, once it has completed the debt pay down/restructuring phase stemming from its 1999 merger, will be an active participant in the second half of 2002, he adds. Feinstein expects larger transactions by both companies.
Growth By Absorption
Harris DeWese, chairman of Compass Capital Partners, which offers M&A advisory services to the commercial printing industry, sees printers that have experienced a "plateauing" of sales and are seeking to "grow externally by absorbing smaller, weaker competitors."
DeWese also expects M&A action to increase in the second half of 2002: "Most of the activity will be taking place in the commercial printing segment, labels and direct mail, with some of the bigger buyers announcing one or two big deals," DeWese says. "Moore is already back with a big acquisition. The publicity associated with the bigger deals helps fuel smaller deals."
DeWese expects to see more consolidations by smaller firms pooling their assets under one roof to eliminate multiple overheads and enjoy increased equipment utilization.
Time For Survival
"It's getting tougher and tougher for the smaller printer to survive," he says. "It's tough to get financing. When the banks open up again—if and when they do—the boutiques, the smaller companies, have a chance to survive a little longer. We're definitely going to see some dissipation.
"On the other hand, I'm not talking about a huge, dramatic shift in a short period of time. Over the next 24 months a deal or two in each major market that eliminates some competitors and makes someone who is already fairly substantial in that market bigger."
Consolidated Graphics, which has acquired 65 companies since 1985, didn't make any transactions in either 2000 or 2001, but closed three deals in February 2002. The company continues to evaluate potential deals, according to Joe Davis, chairman and CEO. The company is currently conducting talks with 90 prospective partners.
"We believe our consolidation model works because we are an operator of printing companies," Davis says. "We've been in the commercial printing business a long time and we understand it. We've been fortunate enough to have bought some really, really good companies with great management teams."
Winning Characteristics
Maintaining a strong balance sheet has also been a critical factor, according to Chris Colville, Consolidated Graphics' executive vice president and CFO. It is also a characteristic the company seeks in other firms, along with great management and customer service.
"We found that the good companies with really good management teams...understood what a fair valuation for their company was and that, long term, the prospect of joining the industry leader was what made sense," Colville notes.
Many eyes are focused on Quebecor World which, while not an active consolidator, tends to make a rather large splash with its mergers and acquisitions. According to Rick Lane, executive vice president at Quebecor World, the company is open to two types of acquisitions: "Those of a publisher/printer, as in our recent Hachette transaction, where we can have certainty of business going forward through a long-term contract. We are also open to niche acquisitions to strengthen a business line, or to fill in a geography," he says.
"We remain cautious about large strategic acquisitions, as we still lack good visibility into the short- term market strength and therefore projections on project returns," Lane adds.
Mail-Well Inc., of Englewood, Colo., has entered the second phase of its previously announced strategic plan, which is to relaunch a more focused acquisition strategy, according to Paul Reilly, president.
"We have identified six markets where we would like to grow our local market share and the product offering we provide to our customers in that local market," Reilly states.
Unlike the previous generation of M&A activity, Reilly expects to see "a higher level of integration involved, with more emphasis on the operating and customer benefits of the acquisition. In the past, they tended to be more financial. Secondly, the prices that people will be paying will be lower."
Even if the activity level bounces back near the heights of 1998 and 1999—and Reilly, like most, is skeptical—he believes it would take a couple of years to happen.
The stock performances of many traditionally M&A-active printers will have a positive effect on their ability to conduct transactions, according to Feinstein, of Berenson Minella.
"Printing stocks have enjoyed a remarkable recovery over the past 18 months from an era where printing was viewed as 'old economy' and whose business was at risk from the Internet revolution," he remarks. "Wall Street has once again embraced midcap, 'old economy' value plays and this has brought money back into the sector. Printing stocks are now trading at the high end of their historical range.
"This," he adds, "will have a positive effect on M&A activity due to increased confidence, the use of stock as a currency in acquisitions and the return of financial buyers to the industry." IPG
