M&A Momentum Continues Strong in 2016
If you were clocking mergers and acquisitions in the printing industry in 2016, you had plenty to keep yourself busy. The fast pace of transactions in 2016 tells us that the market is sound and many that are looking for opportunities to buy or sell have had little difficulty in locating them. We think 2017 should be another propitious year for owners who move ahead with their plans before the business climate — as it invariably does — becomes less accommodating to M&A dealmaking.
Behind the high-profile deals announced or coming to full fruition this year is a story of ongoing consolidation and the strength it has given to companies able to take advantage of it. A good example is Taylor Corp.’s acquisition of Standard Register. Although this deal initially struck us as a bit risky, it proved to make nothing but sense. The companies served a number of the same vertical markets, and by acquiring Standard’s customers in these segments, Taylor broadened its customer base to a greater extent than it would have been able to do by relying on organic growth alone.
Growth by acquisition on a similarly impressive scale was the outcome of WestRock’s purchase of the packaging business once operated by Cenveo. WestRock itself is the product of an earlier merger of two giants, RockTenn and MeadWestvaco. Speaking of giants, there was also R.R. Donnelley’s self-division into three new operating units, all of which we expect to see pursuing M&A opportunities of their own.
A bit closer to home, we at New Direction Partners handled the sale of Midnight Oil, a world-class marketing firm, to Oak Hill Capital Partners and Imagine! Print Solutions. Oak Hill’s participation in the deal says something significant about the present state of the M&A market for printing and packaging companies.
This is because Oak Hill is a private equity firm — a type of financier that typically showed little interest in the industry until fairly recently. Now, however, private equity firms have considerable amounts of cash that they’re willing to invest in acquiring printing companies, and not just for short-term plays. Of the last five large-scale transactions that New Direction Partners has handled, all but one involved private equity capital. We have other deals in development where private equity’s role should be equally prominent.
It’s a sign of continuing vigor in the dealmaking climate for the printing and packaging industries, and it’s not the only one. The macro indicators are encouraging. The economy is rebounding, although slowly. Interest rates remain at historical lows. The stock market is in good shape. The financing community is robust, and in most cases, it’s easy for qualified borrowers to get loans.
What it all adds up to is a commercial printing sector that is healthier than it has been in years. This means an increasing supply of well run, profitable companies entering the M&A market as their owners decide that the time has come to pull the trigger on selling. Buyers continue to outnumber sellers, but even so, acquisition-minded firms have plenty of attractive targets to choose from.
Everything is trending in the right direction, but a closer look at the trends reminds us that sooner or later, the picture will change. For one thing, it has been eight years since we last entered a recession, as the official period of the one now behind us was December 2007 to June 2009. The recovery has been long and slow, and technically, we are due for another cyclical downturn at some point in the not too distant future.
Business owners understand this. Knowing that good times can turn less than good motivates some of them to sell through what we call “the Cerberus effect.” Having come face to face with the three-headed dog of Hades during the last recession, they don’t want to have to deal with the monster again. Their response — a wise one — is to set an exit strategy in motion now by preparing their businesses for new ownership.
Looking at trends in business valuation and sale pricing, we foresee steady but modest growth in both from now on. Twenty years ago, the prices at which firms sold could spike and dip pretty wildly. Even two years ago, pricing increased dramatically. Prices are still rising, but at a gentler rate. The EBITDA multiples on which price is calculated are holding steady as well, at about the same levels they were at the beginning of 2016. It’s a healthier balance for the industry than price swings, but it also tells sellers that holding out for numbers bigger than the ones they currently can get probably is not going to be realistic.
And that brings us to our advice for the new year. Barring calamity, the industry should continue to do well in 2017 and see M&A activity on par with what it experienced last year. Among smaller companies, there is still plenty of room for acquisitions by tuck-in — transferring the production from the selling firm to the buying firm with a payout to the seller over time.
While we would refrain from saying that the opportunities are as good as they are ever going to get, we don’t hesitate to tell those who have made a decision to sell that acting on it now is strongly to their advantage. A sale takes time to structure and execute, and the longer the beginning of the process is put off, the more chance there is of something happening to block or even kill the deal.
For buyers, the urgency should come from knowing that in flat or contracting markets for many kinds of print, finding new customers and increasing share of existing ones is becoming increasingly difficult. Fortunately, growing organically isn’t the only way to get bigger. For today’s ambitious firms, a well-timed acquisition is the strategic route to the next level of business performance.
Consider your options, consult with your stakeholders, get expert professional advice, and proceed with confidence. As 2016 was, 2017 should be a year to celebrate for buyers and sellers with the determination to make the most of what it has to offer them.
Peter Schaefer, partner at New Direction Partners, is an experienced dealmaker with more than 25 years of investment banking and valuation experience, 20 of which has been focused exclusively on the printing and packaging industries. He has closed more than one hundred transactions in virtually every segment of the printing and packaging industries. In addition, he has performed hundreds of valuations for ESOPs, estate and gift tax planning and strategic planning purposes. Contact him at (610) 230-0635, ext. 701.