Top Traits of the Most Attractive Companies

We have been saying for a long time now that M&A opportunities are abundant both for sellers and for buyers of printing and packaging companies. We all know that the economic climate for M&As is bound to change sooner or later. But, while market conditions remain as they are, we aren’t likely to see a better moment for testing the waters and, hopefully, striking profitable deals.

The M&A marketplace is still so vigorous, in fact, that few companies within it don’t look attractive as targets for acquisition. An exception might be a small business that has failed to invest adequately in technology; or one located in a region where there aren’t many firms with the financial heft that purchasing another company requires. Apart from cases like these, however, it’s become difficult to find a printing business that no other printing business would see as having at least some potential for acquisition.

This is because the attractiveness of an in-place customer base is universal: prospective buyers know that as long as customer relationships are intact, the seller has value worth investing in. But, strategic buyers — those looking to broaden their product offerings and market profiles besides increasing sales — also want evidence that the seller has what it takes to grow faster than the industry as a whole.

This is why they favor acquisition candidates that:

• serve a cross-section of growing vertical markets.
• invest in technologies that enable them to increase market share in the niches they occupy.
• serve fast-growing, specialized verticals (example: life sciences) where demand for print is rising and competition is limited.

We call firms meeting these descriptions the “haves:” those with the attributes that draw the most interest from buyers and generate the most proceeds for their owners when sold. As commercial printers, they’re usually providers of non-commodity services including large-format output, retail POP, customized direct marketing, digital print, data analytics, fulfillment, brand and document management, and creative support.

Packaging in general is attractive because it isn’t subject to cyclical market swings. As long as consumer goods have to be sent to market in containers, packaging will remain as “recession proof” as any print-based form of manufacturing can be.

Its premium segments are flexible packaging, shrink sleeves, labels, pharmaceutical packaging, folding cartons, and corrugated. Buyers are also showing keen interest in “web to package” workflows that enable the production of small, customized runs through input from e-commerce portals.

Product mix, production capabilities, and financial characteristics (discussed below) are important to buyers, but so are qualitative factors that tell them what operating and managing the acquired company is going to be like. A good sign, for example, is a “sticky” customer base that the seller caters to with specialty products and services that the competition can’t easily duplicate. A non-union environment is another plus, as is the seller’s willingness to stay on in a management role during the ownership transition.

The financial criteria for acquisition are what they always have been: a healthy balance sheet; demonstrated revenue growth; strong EBITDA; avoidance of account concentration; and critical mass in markets served. Buyers particularly like to see program selling — regularly recurring work, often generated by e-commerce — overtaking one-off, transactional selling.

A notable change to the financial aspect of print and packaging M&As is the fact that today, so many of them are being driven and funded by private equity (PE) investors. It’s estimated that the PE market as a whole consists of up to $1 trillion in investment capital. Some of that money is finding its way into the printing and packaging sectors — a remarkable development considering that not so many years ago, print was of little interest to these well-heeled opportunity-seekers.

But now, a printing or a packaging company with at least $3 million worth of EBITDA represents the kind of business that PE players want to take a closer look at. Some of them are self-financed; others are “fundless” firms that have access to capital from various sources. Or, they may be “family offices” managing the resources and investments of wealthy individuals.

Their objectives vary. Although some invest to resell within a specified period of time, others have longer-term strategic plans similar to those of print company owners focusing on growth by acquisition. Family offices, for example, may prefer receiving sustained annual dividends to pocketing the proceeds from a resale in five to seven years.

All PE investors expect sellers to have strong assets on the balance sheet; good working capital; and receivables and equipment that can be borrowed against or pledged as security. They’ll be wary of excessive debt and of signs that the owner has been using profits to support a lifestyle instead of plowing them back into the business to stimulate growth.

The seller’s equipment list will also come under scrutiny. PE investors, like other types of buyers, want to be assured that the production department has up-to-date presses and other machinery that can produce cost efficiently and handle surges in demand. This means that sellers shouldn’t hesitate to install equipment that will satisfy these expectations, both for the sake of their own operations and for the sake of being attractive to potential buyers.

At the end of the day, an “attractive” company is a well-managed company: one whose owner has kept it competitive by making the right decisions about market focus, technical capability, and customer relationships. Firms like these never lack suitors in an M&A marketplace that, for the moment, can’t seem to find enough of them.

Companies that haven’t performed as well may not get the same measure of attention, but that doesn’t exclude them from the action. By selling their active accounts in transactions structured as tuck-ins, owners of less desirable businesses get an exit strategy and a way to be compensated for the value they have created.

The point is that in M&As, attractiveness is always in the eye of the beholder. Happily for sellers of businesses of all types, there are still plenty of eyes looking their way.

About the Authors

Paul Reilly and Peter Schaefer are partners in New Direction Partners (NDP), the leading provider of advisory services for printing and packaging firms seeking growth and opportunity through mergers and acquisitions. NDP assists its clients by giving them expert guidance and peace of mind at every stage of the process of buying or selling a printing or packaging company. Services include representing selling shareholders; acquisition searches; valuation; capital formation and financing; and strategic planning. NDP’s partners have participated in more than 300 mergers and acquisitions since 1979. Collectively they possess more than 200 years of industry experience with transactions in aggregate exceeding $2 billion. For information, email info@newdirectionpartners.com.