Boom or Bust: Have M&As Increased as Expected?
Two years into the pandemic, we still have more questions than answers. Why doesn’t the virus behave in anything resembling a predictable manner? How long will it take global supply chains to return to normal? Did people really lose their minds over toilet paper, or is that just a false memory from an early-pandemic fever dream?
It may be years before we know those answers, if we ever learn them at all. But we’re far closer to answering at least one of the print and promo industry’s big questions of the last two years: What effect will the pandemic have on the industry’s mergers and acquisitions landscape?
When we asked this question last year, the prevailing theory was that, after mostly coming to a standstill in early 2020, M&A activity would ramp up significantly in late 2020 and through 2021 as industry companies gained a better understanding of their short-term and long-term health. Suppliers and distributors that thrived early in the pandemic would be looking to buy. Companies that struggled or broke even would be more likely to cash out. The industry was primed for a full-on M&A boom.
Is that how things played out? Recent industry M&A activity would seem to suggest so. After making three acquisitions between 2010 and 2020, S&S Activewear made two in the last six months alone. (One of them, TSC Apparel, was itself a top-20 industry supplier.) SnugZ USA acquired fellow top-25 supplier Sweda Company USA in January. RR Donnelly & Sons, the world’s largest commercial printer, was acquired in February after a lengthy private equity bidding war.
Those are all high-profile acquisitions. And the general consensus is that overall M&A activity has indeed increased compared to 2020. But some industry experts disagree on how big a role the pandemic has played, while other developments over the last year have complicated the tidy post-pandemic-boom narrative.
In this story, we’ll explore all that (and more) as we recap the last year in industry M&A and speculate on its future. We also asked the M&A experts for their best tips and strategies for buyers and sellers.
State of M&A
Let’s first take a look at the current industry M&A landscape and how it compares to this time last year. In the 12 months from April 2020 to March 2021, we covered 31 notable mergers or acquisitions. From April 2021 to March 2022, we covered 41. This doesn’t include all industry mergers and acquisitions over that span, just the larger ones. And it’s not quite a boom regardless. But what happens if we expand the sample size and slice the data a bit differently?
In the 18 months from April 2019 to September 2020, there were 40 notable industry mergers and acquisitions. In the next 18-month period, from October 2020 to March 2022, there were 60. This isn’t an arbitrary dataset. The first period covers the 11 months before the start of the pandemic and the seven months after, giving us a reference point for pre-pandemic M&A and accounting for the middle months of 2020 when it was mostly on pause. The second period starts roughly around the time activity began to resume and takes us up through now.
That’s a 50% increase in acquisitions from the first period to the second, in line with last year’s predictions that activity would significantly increase. And while the above data is, again, limited to bigger print and promo deals only, anecdotal data and observations from industry experts also indicate that M&A is indeed booming.
“Yes, the M&A predictions were correct,” says Ashley McCune, president of Facilisgroup, St. Louis. “In the early days of the pandemic, mergers and acquisitions came to a halt. Companies were holding on to their cash because of the uncertainty, and that money kept building, especially for private equity companies. Companies are now looking to use those resources in a major way. For the past nine months or so, M&A has been accelerating with the access to cash, owners looking to retire and the disruption of the traditional family business.”
Facilisgroup is primarily a promotional products technology company that provides software solutions for distributors: automation, workflow tools, e-commerce stores. For years, the company has also provided its distributor partners with guidance and information on the acquisition process and helped connect buyers and sellers. Until recently, this had been informal. But demand for these services became so great in 2021 that Facilisgroup developed them into a dedicated service.
“After noticing a steady (and increasing) need for M&A guidance, we launched Facilis Connect around a year ago to give structure to our previous process,” McCune says. “We have events twice a year for sellers to meet buyers and vice versa, and at any time our partners can reach out if they need guidance.”
The company has since facilitated three acquisitions, including Stran & Company’s purchase of GAP Promotions, a major deal that closed in January. And Facilisgroup has said that M&A deals involving its partner companies increased by more than 200% in 2021 over 2019. McCune believes more deals like this are to come.
“Our industry is in the middle of increased M&A opportunities, and over the next one to two years, I think it’ll only become more pronounced,” she says. “Big companies are getting bigger, and the small or medium companies are being acquired for the reasons I describe above.”
Mike Philie believes the same. As president and principal of Philie Group, a consulting firm for leaders and organizations in the graphic communications industry, Philie doesn’t actively participate in M&A outreach, but he advises on strategic fit and culture for buyers and sellers in the acquisition process. Lately, he’s seen an uptick in M&A activity, and he expects that pace to continue or increase over the rest of 2022 and into 2023 as the gap between “leaders” and “laggers” continues to widen.
The leaders, Philie says, emerged from the pandemic in better shape than ever, putting Paycheck Protection Program funds to good use and positioning themselves for long-term success. These companies are flush with cash and looking to build upon their momentum with strategic acquisitions. The laggers, meanwhile, continue to burn through PPP funds, unable to fully recover from pandemic losses and in poor position to take advantage of returning demand.
This is, essentially, the original post-pandemic M&A boom theory in action. But Philie believes there’s more to it. The supply chain issues of the last year, he says, have for some businesses taken a protracted toll on both revenue and morale (as we saw in our November story on the industry’s burnout problem). These issues were too new to account for in the M&A equation this time last year, but they’ve since added another set of challenges and frustrations that might be the final straw for companies that had struggled during the pandemic.
“When people decide to sell or they feel like they have to sell, there’s usually some kind of triggering event,” Philie says. “The symptoms may occur over time, but there’s usually something that has to happen that, all of a sudden, ‘OK, I’m out. Check please.’ There’s a triggering event. And I think this could be one of those, right? Because it’s very frustrating for everybody right now, and particularly if you don’t have the infrastructure built in — the people to devote time to chase down supply chain things. Because in some cases that’s almost become a full-time job now.”
Others in the industry have speculated that this will happen, leading to even more M&A. But not everyone is so sure. Jim Anderson is founder and president of Corporate Development Associates, a private intermediary firm based in Scottsdale, Arizona, that provides personalized M&A advisory services to print and promo companies. For 35 years, Anderson has specialized in industry M&A, working with clients like Ennis Inc., Smart Source and PDF Print Communications. He’s seen it all.
Anderson acknowledges that there’s been a recent uptick in mergers and acquisitions, particularly in the labels segment, but he stops short of calling 2021 a boom year. And while he agrees that the pandemic has had an impact on the M&A market, he believes the extent of that impact has been overstated.
“I do not see the pandemic being as much of a factor as people would make it out to be,” Anderson says. “Consolidation is ongoing and owners get old, sick or just bored, as they have for all the years I have been an intermediary. We have a number of older owners/founders in the printing industry who are reaching ‘the age’ (say, 65-70), and they want to retire. We don’t see too many younger owners (say, 50-60) wanting to cash out.”
Buying & Selling
At this point, debate over the pandemic’s impact on M&A is mostly academic. And, unfortunately, there’s still plenty of time for the supply chain fatigue scenario to play out, with shipping issues, price increases and inventory challenges not going away any time soon. As 2022 progresses, we’ll see if more businesses look to sell as these issues continue to pile up. But, whatever the underlying reasons, industry M&A is back and going strong. And if you’re buying or selling (or considering either), there’s a lot to know. Let’s look at three big things to consider.
1. Planning (well) ahead
Mergers and acquisitions don’t happen overnight. It often takes months (if not longer) to finalize a deal, and that’s not counting the time it takes to find a buyer or seller in the first place. But, if you’re looking to sell, the process should begin long before any of that.
“The primary piece of advice I’d give to those looking to sell is being prepared and organized years in advance, even though they’re in the middle of running their business,” says McCune. “As straightforward as it sounds, preparation is key. Getting contracts together and understanding commission plans are both very important, especially for those new to M&A. I recommend distributors of any size to spend time thinking about their non-negotiables. What role do they want to have in their company, if any? If they stay, are they OK with having a boss? It’s not a question people usually think to ask after working for themselves for many years and having the final say, but it’s an important one for distributors looking to sell.”
Philie likens this preparation process to selling a house, or at least how selling a house used to go before the pandemic turned the real estate market into a feeding frenzy. A house that’s been freshly painted, remodeled, cleaned up and staged will typically sell for more (and sell faster) than a house listed as-is. The same is true of a business, Philie says.
That means sellers should take a number of steps before they even look for a buyer. These include: Making sure financials are organized and prepared correctly. Cleaning up debt. Diversifying client concentration if revenue is too concentrated in a few top accounts. (This reduces risk for the buyer, Philie says.) Transferring accounts away from the owner and to other salespeople, to hedge against clients leaving once ownership changes. (Again, this reduces risk.) These things can take months or years. But they position sellers to get the maximum value for their companies.
“If it’s not where it should be, take that next year or 18 months, and really work specifically on [those things],” says Philie. “And, again, using the house analogy, we’re gonna start by painting everything, we’re gonna redo the bathrooms, we’re gonna do some landscaping. Make it look pretty from the curb.”
2. Strategic fit
The financial side is only part of the M&A equation, and it’s arguably not even the most important part. Philie says he’s never seen a deal go bad because a buyer paid too much or regretted agreeing to certain terms. But he has seen things get ugly when buyers and sellers don’t give enough thought to what their newly joined companies will look like after the deal is completed.
“Once the numbers make sense, and you’ve got that part of it fixed, then there’s really the strategic fit and the culture of the combined businesses,” he says. “To me, it’s kinda like, ‘Well, what does this look like the day after the papers are signed — then what happens? Strategic fit is really about, ‘OK, how does one plus one equal three? How do I take your company, put it in my company, and now become something better than both of us could have been on our own?”
To ensure things run smoothly, it’s best to begin developing a detailed consolidation strategy well in advance. That way, on day one, employees know where to go, who they report to and what to expect from new ownership. This might sound obvious, but Philie says buyers overlook it more often than you’d think.
“Who’s going to sit where and when? What’s the sales effort going to look like? What’s the sales compensation going to look like? Who are the managers? Who’s going to run the equipment?,” says Philie. “All of those things, not always, but oftentimes, throughout all the negotiations and all that, it’s kinda like, ‘Yeah, we’ve talked about that, we’ll get to the details as we go, we’ve got a good understanding.’ So, great — what is that understanding?”
This will likely involve tough decisions, especially if two larger organizations are combining: Whose accounting department do you keep? Will there be changes to your leadership team? What vendors are you going to use? Can you integrate your ERP systems? (And so on.) But that’s all the more reason not to treat strategic fit as an afterthought in the acquisition process.
“Those difficult decisions, to me, should be worked out as best they can up front,” Philie says. “And oftentimes they’re not. And then the first thing we know, we’re three months, six months, nine months, two years into this thing, and we haven’t made that one plus one equal three yet.”
3. Expert guidance
The M&A process can be daunting for buyers and sellers alike. But they don’t have to go it alone. Many of the large distributor organizations and partnering networks offer guidance for their members and owners. And there are a number of brokers, consultants and advisory firms that specialize in mergers and acquisitions for print and promo companies. Anderson advised utilizing these services where possible.
“Most small print and promo distributors do not make much money beyond the owner’s salary, which makes it tough to sell the business and get enough to afford to retire,” he says. “Corporate Development Associates has many active acquirers who pay us a monthly retainer to find good seller prospects for them. When you want to sell (or buy) a house, do you try to go it alone, or do you contact a real estate broker?”
There’s another house metaphor, and this time it applies to buyers too. Sellers have to get their houses in order (literally and figuratively) before a sale. But there are more buyers than sellers, Anderson says, which means buyers need to make a convincing case for why a seller should choose their offer over a competing one. Having a team of dedicated and experienced M&A advisors, both internal and external, gives buyers a better chance.
For sellers, advisory firms can help with one of the trickiest aspects of the process: valuation. Philie says that it’s relatively easy to determine what a business is worth, but it’s significantly harder to determine what a buyer will actually pay for it. That’s a crucial distinction.
“The accountants and CPA firms, it’s not a knock against them, but they will tell you what your business is worth based on the numbers,” says Philie. “The M&A guys will tell you what people are paying for that kind of business in your shape, with your financials, with your market presence and where you are today. So there’s a big difference. A lot has to do not only with the numbers, but with the unique things that you do. Are you vanilla or are there sprinkles on top? Do you have anything really special going on? They will help walk you through a lot of this stuff.”