A Look Back at the Year in M&A

There is no better feeling in business than coming to the end of a good year with the wind still at your back for another one. It’s a pleasure to be able to sum up 2015 in this way as we review how the year played out for mergers and acquisitions among printing and packaging companies.

All year long, we saw many encouraging trends for businesses ready to either grow by acquisition or be acquired by other firms. At the head of the list for the first time in a long time was the fact that there were more buyers in the market than sellers. Nevertheless, firms wishing to establish themselves in new markets by buying their way in found plenty of candidates with the processes and/or the intellectual property they were looking for.

Meanwhile, the cost of capital remained low, and optimism about the industry continued to rebound. We also noted that printers seemed better informed about the opportunities available to them in well planned and executed M&As.

Although the desire for business growth was a primary driver, buyers had other motives besides volume expansion. We completed a number of deals on behalf of first-time owners: executives and senior managers of printing firms with dreams of having companies of their own. Private equity investors who saw chances to make money in selected segments of the industry, often with long-range goals in mind, were welcome on the scene.

As for sellers, more of them came to see how being acquired can serve as a major step forward in the life cycle of a business. For owners of well-run businesses that are eligible for acquisition as going concerns, becoming part of a larger organization in the same market space can bring about the kind of growth spurt that might be hard to achieve in an independent operation. New Direction Partners completed significantly more deals of this type in 2015 than in prior years — an indication both of the improved health of the industry and of printers’ growing appreciation of M&As as business opportunities.

Naturally, there was more opportunity for some firms than for others. Companies with specialized capabilities and the staff talent to go along with them were most attractive to buyers. The real stars were those that were both specialized and demonstrably profitable. Companies fitting that description are selling at higher premiums than they would have just two or three years ago.

In M&As, as in all other areas of business, nothing succeeds like success. Some sales are driven by necessity, and others are executed for convenience. But the sellers who find themselves in the most favorable positions are always there because of circumstances they have created themselves — a track record of results that make them irresistible to buyers.

Seldom found in this category, unfortunately, are firms concentrated in traditional product segments, such as books and newspapers. Companies that are large but not profitable also face a hard road, as few buyers would find much justification for committing money to a business that was barely breaking even. Plants with unionized workforces can be another tough sell.

Companies in the most difficult spot of all are those for whom being acquired is disappearing as an option. These tend to be conventional offset plants with general commercial product lines and commodity pricing. Many firms of this type didn’t survive the recession. The ones that managed to scrape by did so because their equipment, though old, is paid for, and their overall level of debt is low.

Banks may not control them, but that doesn’t mean they are in control of their own destinies. A company in these straits may make enough to support the lifestyles of its owners, but not enough to invest in new capabilities. This leaves little to appeal to buyers, and the endgame may be a steady dwindling of the business until there is no other way out but liquidation.

Happily, we saw less of this in 2015 than during the depths of the recession. But for firms in this situation, there was still an answer: the sale of active accounts in a deal structured as a tuck-in. Even when our evaluation of assets reveals that the company’s material property isn’t worth much, we counsel that the book of business is always worth something. This means that in good years or bad, there is always an alternative to just shutting the doors.

As the strongest year the industry has seen since the end of the downturn, 2015 held a few pleasant surprises. One of them, already mentioned, was the increased participation of private equity investors. A few years ago, we never would have guessed that these entrepreneurial financiers would be as involved in print industry M&As as they are now. That’s a sign of renewed confidence in the sector, as is the rise in EBITDA multiples being paid for the most competitive firms.

Personally, we can look back on a year marked by numerous deals that were exceptionally satisfying to help our clients close. In one of them, the buyer moved swiftly to make organizational improvements that did not involve a heavy investment in new equipment. By maximizing the existing potential of the acquired company, the buyer gave it a new lease on the future in less than a year — an outcome that left everyone smiling, including the employees.

Another client is the former president and co-owner of a company purchased by a larger firm that asked him to stay on in an executive management role. By selling, he kept his ties with the business he helped to build and gained a new professional challenge he finds fulfilling. It’s more evidence that for sellers, M&As can be as much about new beginnings as they are about final chapters.

Year-end predictions always contain a certain amount of guesswork, but as M&A advisors, we like what we think we see ahead in 2016. The industry and the economy as a whole continue to improve modestly but measurably. Confidence is solid. Owners are more open to the possibilities of growth by acquisition if they are buyers or a profitable transfer of ownership if they are sellers.

In short, we should all have interesting times to look forward to on the M&A front in 2016. New Direction Partners sends its best wishes to clients, readers and friends for the new year.