Merger and acquisition activity should continue
By John Hyde
Merger and acquisition activity so far in 2004 has seen fewer distressed sellers entering the market due to a pick up in business activity that, in many cases, is simply postponing the day of reckoning for troubled printers. It’s fair to say that the pace and velocity of industry consolidation among small and mid-sized printers has declined after a frenzy in 2002 and 2003.

As a first-hand observer of M&A activity for many years, my view is that the long-term trend of industry-wide consolidation remains on track as fundamental driving forces continue to pose viability challenges for owners. These forces include changing technology requiring a continuous cycle of investment, rising customer demands, decreasing job pricing, and other factors that have been well documented in industry publications.

Preserve and protect, or invest further?
These fundamental trends suggest that owners and senior managers should consider whether their motivation is to preserve capital and protect what they have built, or whether they are willing to take the next step and grow their business by further investment in equipment, infrastructure, and personnel. There’s no hard and fast rule, but motivation for preserving capital tends to favor a decision to sell the business, while growth-minded companies often become acquirers as they buy the customers, sales personnel, and/or capabilities of other companies.

Several of my Greater Boston area clients closed transactions in the first quarter of 2004 that illustrate these trends. The owners of Champagne Lafayette Communications of Natick, Mass., had retired from daily operations and wanted to preserve capital. They sold Champagne to Consolidated Graphics who merged Champagne into Pride Printers as a way to grow Pride’s market presence. Direct mail printer Rivkind Associates of Stoughton, Mass., had the objective of acquiring design and database management capabilities to add a new service offering. To implement this growth strategy, Rivkind put together a transaction with a creative firm that now provides these services to Rivkind’s customers.

The single toughest strategic issue facing owners/senior managers today is whether and how to grow, or when and how to exit. The tough question is whether to “hang in there” and try to implement the meaningful and costly changes that are necessary to compete effectively in light of fundamental trends, or whether to sell in the near future as a way to “get out while they can.”

Debt and cash flow always among top concerns
I am often asked for guidance on metrics for helping to guide owners/senior managers in assessing their financial health from the perspective of whether to “stay in the game” or “get out.” Debt and cash flow are concerns at the top of the list.

Printers are often highly leveraged due to the capital-intensive nature of the industry. How much debt is too much? One way to measure this is to examine the ratio of net liquidation value of equipment to aggregate equipment loans and leases. A ratio of 1:1 is acceptable, although many printers fall below this level as equipment values have declined in recent years. An equipment appraisal for measuring liquidation value is the best method to ascertain the value of plant equipment, but owners should avoid using the fair market standard, as there really isn’t a fair market these days if they want to dispose of equipment. It is a common fallacy that a business cannot be sold if the value of equipment is less than the debt, so although the equipment value to debt ratio is important for planning purposes, it should not be the deciding factor as to whether a sale is feasible and appropriate.

Another important measurement of how much debt can be carried is based on cash flow analysis. I look at a ratio of recast EBITDA to annual payments on loans and leases. A ratio of 1:1 suggests the company is “holding on”, and a ratio of less than 1:1 may call for necessary restructuring of debt or other corrective measures.

A third metric of viability involves working capital. I look at a ratio of cash plus net account receivables to account payables and accrued expenses. A 2:1 ratio is considered very healthy. Few companies achieve this level. I advise excluding inventory from this calculation, although banks tend to include it. There are many companies with working capital ratios of 1:1 or less, and restructuring of accounts payable, loans, and leases is required in many of these situations in order for a sale to be consummated.

Family and personal issues may be a hindrance
Personal and family issues may hinder objective assessment of options. I have seen unfortunate cases where “delay” results in deterioration of the business to the point where there is little or nothing left to sell. The father-son owners of my client, Maran Printing of Arlington, Mass., tried in vane to save their 60-year-old business while they struggled with the emotional decision to close the plant, even when the numbers were bleak for more than a year.

Serious warning signs of “being near the end” include inability to further juggle accounts payable so that the lack of paper and supplies is affecting customers and sales persons; the departure of key personnel who are “fed up” and otherwise would stay with the company; tension at home with spouse and family over the floundering and pattern of failed turnaround measures; nervous bankers, asking more probing questions than usual, especially if a line of credit is ready to mature, if payments are late, if the checking account is in overdraft, or if the financial statements showing continued losses; and if the main decision makers are sleeping a lot less at night.

Conversations with owners and senior managers in recent months indicate uncertainty as to evaluating the timing for a sale of the business to maximize its value. This is especially true for companies that stabilized their business in 2003 after losing money in 2001 and 2002.

Companies that went to the edge and survived the turmoil of recent years may want to think about whether they can build the business to overcome industry challenges, or whether they are ready to go into survival mode again if the economy takes a turn for the worse or if individual circumstances change course.

Thinking about the future
A company’s size measured by annual sales has a bearing on the M&A options that owners and senior managers can assess and implement. The following summary may be useful for planning purposes, but in no way is it definitive.

Small Printers: Extremely few buyers for a small printer’s infrastructure (The Ink Spot of Quincy, MA, was sold to John Winter in the fourth quarter 2003, one of very few plant sales in recent years). A sale of general intangibles (customer list, name, etc.) to a mid-sized printer, combined with orderly liquidation of the plant, is the best exit plan in most cases.

Mid-sized printers: These are in excellent position to get significant value for their general intangibles in a sale to a large printer or a merger with another mid-sized printer. Some mid-sized printers have attractive infrastructure and/or capabilities that make them attractive beyond the customer accounts, and can be sold or merged to local or regional buyers.

Large regional printers: Many acquirers are in this group, as their greater staying power helped them through the problems in recent years, now they are poised to grow “faster, better, cheaper” by acquisition than by one sales person and one customer at a time.

National level public companies: The trade media seems to use public company M&A activity as a barometer of M&A activity throughout the industry generally, and as a result, many publications failed to report on the vibrant M&A marketplace involving private companies who bought, sold, merged, liquidated, partnered, and somehow combined with each other as the industry went through extreme hardship in recent years.

The bottom line is that M&A activity will continue with ups and downs for many years to come as the printing industry further consolidates. Owners and senior managers that embrace exploring M&A opportunities are well positioned to participate in this trend and effectively use strategic transactions to accomplish their objectives.

Editor’s note: Shortly after submission of this article, Rampart Associates was acquired by the National Association of Printing Leadership, a national trade association serving the commercial printing industry. John Hyde, who founded Rampart in 1990, joined NAPL as a managing director of consulting services.

About the author: John Hyde founded Rampart Associates in 1990 after working at the New York law firm of Chadbourne & Parke where he focused mainly on mergers and acquisitions. He can be reached through the NAPL at www.napl.org.