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Spotlight on M&A
Buyer of Choice.
We spoke with Jim Cohen, Executive Vice President of Mergers and Acquisitions at Consolidated Graphics, to get the inside scoop on the print industry’s M&A landscape. Cohen joined CGX in 2005, and has led the company’s very active acquisition strategy since then, increasing the size of CGX by about 30% during this period. In recognition of his contributions to the printing industry, last year Mr. Cohen was inducted into the National Association of Printing Leadership’s Soderstrom Society, the honorary society that recognizes outstanding contributions of service and leadership in the printing industry.
How have you seen the industry change since joining CGX in 2005?
Cohen:
The biggest change has been in the last two years, as the printing
industry was hit hard by the recession. CGX was fortunately very well
positioned when the recession hit because we have one of the strongest
balance sheets in the printing industry, and this allowed us to
continue to aggressively look at acquisition opportunities, but the
industry as a whole has changed dramatically. Unlike before the
recession, it became very difficult to find printing companies that were
growing and profitable. So we had to get creative and see if we could
make lemonade out of lemons with some of the distressed deals we were
seeing literally every day of the week. I also redoubled my efforts in
sourcing acquisition candidates because when you look at turnaround
situations you have to pick your targets even more carefully because
there is virtually no margin for error. We have become very experienced
in the last two years in devising structures that work for distressed
companies and have managed to make the transactions win win for both
sides. Most of the companies we have looked at over the last two years
will most likely not be around two years from now, and the owners more
often than not have personal guarantees which could wipe them out if
their businesses fail. It is a terrible situation for printing company
owners today, and I am very sympathetic. I’ve also tried to make clear
to owners today that we do have an interest in looking at your company
even if it is in financial distress. So we are looking at a very
changed landscape these days. It is definitely very challenging today
for most printers out there, including us.
Another
big change unrelated to the economy is the role that technology and
digital plays in our business today. Solutions selling is no longer a
buzzword, and customers don’t care what kind of equipment you own. They
want solutions. The growth in digital printing is great for us because
we have the world’s largest and most modern network of digital presses,
but it is a real struggle for independents because digital printing
only makes sense if you can sell solutions. To sell solutions, you need
a pretty special type of salesperson. Then if you actually have someone
who can sell solutions, you are most likely going to need multiple
digital presses. And these presses need constant upgrades just like
your laptop so printers will find themselves spending a lot more on
digital equipment than they ever spent on offset. This isn’t intuitive
initially to printing company owners because the initial outlay for a
digital press is typically less than for an offset press. But layer on
click charges, down time, software upgrades and the rapid evolution of
digital printing technology, and you’re going to find that you need a
lot of capital to compete in the digital arena. This is going to change
our industry dramatically in the next few years.
How has the downturn impacted CGX from an M&A perspective?
Cohen:
As I mentioned, we’re in a relatively good financial position, which
allows us to continue looking at M&A opportunities in the industry.
With so many distressed companies out there, we’ve become a white knight
to some degree, rescuing some of these companies from almost certain
liquidation or bankruptcy. We’re also continuing to invest in our
business, positioning ourselves as an even stronger competitor when the
economy rebounds. This ability to reinvest is a key differentiator for
us.
What things do you look for when identifying acquisition opportunities?
Cohen:
There are a lot of factors we look for when assessing an acquisition
opportunity. The most important one is that it must fit into CGX’s
overall strategy, and complement our current product and service
offering. We look at earnings growth, the strength of the management
team and employees as well as the company’s customer base. We look for a
history of reinvestment in the business (quality of their equipment)
and a good reputation, either nationally or in the local community in
which they operate. There isn’t a single formula for what makes a
company attractive to CGX, but rather a combination of qualitative and
quantitative considerations. Cultural fit is also extremely important.
What is most attractive about CGX from the perspective of acquisition candidates?
Cohen:
There are a lot of benefits to being aligned with a company like ours.
We allow owners to take their chips off the table but also to continue
running their business as part of one of the world’s leaders in
printing. This is a pretty exciting “Chapter Two” that we offer owners
in terms of their own careers. At the same time, we allow owners to
continue to run their businesses autonomously, maintaining the structure
and processes that make the most sense for them, and operating under
their own name so as to preserve the brand equity they have built over
multiple generations in many cases. Allowing former entrepreneurs a
healthy dose of autonomy is attractive to sellers. We also provide the
risk capital and as the bank, we relieve sellers of having to both worry
about securing financing and personal guarantees on debt. Also,
sellers also find themselves with an instant peer group of 70 other
presidents who are best in class themselves and are always available to
share best practices.
It
is also the best result for their employees because we own our
companies for the long-term and are not looking to make a quick flip
like a financial buyer would. We’ll also invest in the businesses we
buy to ensure that they succeed and that their customers’ needs are met
at all levels. And with our strong balance sheet and breadth of product
offerings, an acquired company’s employees know that they are part of a
financially sound industry leader, and if they are in sales they can
offer a lot more in the way of solutions and products to their
customers.
We
also offer better distribution to an acquired company’s customers
because we are in or near every major metropolitan area in the US and
also own companies in Toronto and central Europe and have strategic
alliances with companies in Asia. This is a great benefit to national
and international customers as well as those who are looking to have a
smaller carbon footprint by using a distribute and print model rather
than vice versa. We also offer customers a broader service offering
(web, sheet fed, digital, POP, large format, direct mail, etc.).
What M&A trends do you foresee going forward?
Cohen:
I think even as the economy recovers, we will continue to see many
companies fail over the next two to four years. This kind of lag is
pretty typical with economic recoveries. As banks continue their own
recovery and finish dealing with their larger credit risks, they will
turn their attention to their smaller printing credits and be more
willing to take the write offs that they’ve been ignoring for the last
couple of years. As the struggling printers disappear, so will their
desperate pricing strategies, and that will benefit the survivors who no
longer have to lose money on jobs just to compete.
More
failing companies will inevitably also result in more mergers, but many
of those will be between two equally desperate companies so don’t
expect a lot of those mergers to work long term. But in general as the
economy recovers over the next few years, I expect to see a big pick up
in acquisition activity as earnings return to the point where owners get
comfortable with the value they can pull out of a transaction. Many of
these owners will have wanted to sell for years but had to delay due to
the dip in profitability that they all had to endure during the
recession. So this pent up demand should be a very good thing for our
own acquisition efforts.
Contact Us
Consolidated Graphics, Inc.
5858 Westheimer Ave, Ste 200
Houston, TX 77057
Main: 713-787-0977
Fax: 713-787-5013
5858 Westheimer Ave, Ste 200
Houston, TX 77057
Main: 713-787-0977
Fax: 713-787-5013
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