Building an Alliance

Mergers and acquisitions, typically, are used to grow businesses and to provide and/or enhance service and product innovations. Companies also can gain access to new printing technologies or services by merging with a company or acquiring one that uses the desired technology.

The bitter economy that has plagued the United States for the last few years has crippled many companies' capital and has brought many mergers and acquisitions to a halt. Jim Cohen, executive vice president, mergers and acquisitions, at Houston-based Consolidated Graphics, believes that is on the verge of changing. Translation: Good news for businesses that plan to live long and prosper. Bad news for those companies hanging by a financial thread.

"Over the last two years, the printing industry has been hit hard by the recession. Most companies have experienced revenue declines of anywhere from 15 [percent] to 50 percent, and as a result their earnings have been wiped out. In many cases, printing companies have no positive cash flow and are in various degrees of covenant default (if not payment default) on their credit lines. Many have had to restructure their equipment leases as well. Banks were initially slow to pursue their remedies because they were busy licking their own wounds, [they were] dealing with bigger problems and not eager to take any additional write-offs.

"That is changing and banks are beginning to focus more on their printing industry credits, so I expect even more company failures to occur over the next 18 months as creditors tighten the screws on their poor performers. This is bad news for printers that are in distress but good news for the survivors as excess capacity (and below cost pricing) will be wrung out of the system. What this means for the mergers and acquisitions landscape is that there will be even more opportunities for white knights to rescue distressed companies."

Despite the economy, Cohen said his company has been very active but in a different way.

"Initially (at the start of the recession), we were slower to pull the trigger because we were busy evaluating the chaos that was occurring. We looked at hundreds of potential transactions and didn't do any of them. We are pretty conservative, so we wanted to understand what was happening around us and to the industry in general before we made any big decisions. Over the past year, we've made several acquisitions, and most were distressed in one way or another and we had to be creative in terms of how we structured those transactions so that it was a win-win for both seller and buyer. Today, we are very active and continue to evaluate hundreds of opportunities. We expect to continue to be very active on the acquisition front this year. We still have what we believe is the strongest balance sheet in the industry, and we have ample cash flow to fund our acquisitions."

Value plays a large role when it comes to mergers and acquisitions. Cohen explained value is determined by many factors including, earnings growth, strength of management team, customer base and concentration issues, if any, history of reinvestment in the business, reputation, caliber of employees and age of equipment.

He added that several things make a company attractive to a buyer, including history of earnings growth, potential for continued earnings growth, a history of reinvestment in the business rather than stripping out all earnings, a good customer base and potential to grow sales at each, strong management team, good employees and its reputation in the marketplace.

"Again, in the current economy, we have been and will continue to make acquisitions of distressed companies so it is important for owners to realize that we might have an interest in their business even if some of the above criteria aren't satisfied," Cohen stated.

As for what others are doing in the industry, Cohen, said, generally, much less acquisition activity is occurring because most other buyers have to finance their acquisitions and either can't raise the capital or simply don't want to because they are still trying to recover.

"With respect to mergers in our industry, you do see some of that occurring but more often than not it is two desperate companies trying to prop each other up and no cash is exchanged. Some refer to this as: two drunks trying to hold each other up."