There was some talk last year that the pace of mergers and acquisitions in the printing and packaging industry was beginning to slow. Frankly, we think the same scenario is likely to play out around early 2023, as we see rising interest rates and fears of a recession dampening enthusiasm among many business owners and potential buyers. We all remember well that in the wake of the Great Recession of 2008-2009, printing and packaging were almost boycotted by financial investors and lenders. It's also a reminder that if the overall economy takes a serious downturn, our industry often struggles.
However, none of this has come to fruition in 2023, nor is it expected to happen this year. This is largely due to the business model of financial buyers. This model has proven to be consistently sound and profitable when applied to printing and packaging companies.
Financial buyers are usually investors: private equity (PE) groups use their own capital and borrowed funds to create a business entity with the intention of selling it later for a profit. The strategy is to first acquire one company as a "platform" and then acquire other companies until the desired industry presence and economies of scale are achieved. This process usually takes 3-7 years, and at the end, the group business will be "transferred" to the new owner, bringing a considerable return on investment to the seller.
To achieve this goal, private equity investors are trying to stick to plans to build businesses through acquisitions around platforms – which is exactly what most of them will continue to do with their printing and packaging assets in 2023, regardless of whether What is the overall economic situation? This helped prevent a sharp slowdown in the pace of M&A last year, maintaining momentum to continue stimulating dealmaking in 2024.
Owners of packaging companies – especially flexible packaging and label manufacturers – tend to be the biggest winners in this seller’s market scenario. This is mainly because they are growing. Market and corporate developments drive buyer interest, EBITDA multiples and sales prices from owners prepared to accept offers from financial buyers. However, commercial printing companies may also be on the radar of private equity if they are well managed, profitable and, most importantly, focused on a printing segment where private equity investors see potential for growth.
One of the most attractive applications is direct mail marketing, especially when produced digitally for 1:1 personalization. The other is POP, which has rebounded after the COVID-19 epidemic. The envelope market is also looking good now that it is no longer constrained by paper shortages. Book printing has a place on private equity investors' bucket list of opportunities.
Each of these areas of expertise is a competitive advantage that can lead a company out of the commodity pricing trap. An undifferentiated generic commercial printer may not attract much attention from private equity firms unless it has sufficient scale in the markets it serves.
Industry M&A news over the past few years includes notable examples of private equity firms’ interest in the commercial printing space:
The most active buyer in the space is Marketing.com, owned by JAL Equity, a private equity investor that has made a number of commercial printing acquisitions, with New Direction Partners representing the seller. New Direction Partners represented CP Direct in its sale to Granite Creek Capital as the private equity group's first print investment. This worked so well for them that they subsequently acquired Salem One, which provided packaging and direct mail as well as commercial printing. Granite Creek will transform the acquisition into an independent direct mail platform.
After acquiring Prisma Graphic in 2022, CenterGate Capital is still looking for more opportunities to grow through acquisitions. New Direction Partners represented Sandy Alexander in its sale to Snow Peak Capital and subsequently acquired Abbott Communications, another of our sales clients.
We should not overlook the participation of strategic buyers in the commercial printing M&A market. Strategic buyers seek to acquire companies similar to their own, with the goal of long-term growth. Acquiring similar companies can spur growth by bringing in new customers; expanding the buyer's geographic reach; or adding products, services, and features that the buyer doesn't have.
We are familiar with very active national strategic acquirers such as CJK Group, Mittera and Taylor Enterprises. There are also many regional strategic acquirers looking for suitable opportunities. These buyers know that well-planned and executed strategic acquisitions can create value for everyone involved. Unlike private equity investors who have time-bound resale targets, they view acquisitions as enduring propositions for stability and growth. The continued presence of strategic buyers remains key to keeping the pace of M&A in the commercial printing space healthy and strong.
Considering all these trends, M&A activity should be at least as active in 2024 as in 2023. No one can predict what the economy will look like, but there is reason to be optimistic that interest rates will likely fall, taxes will not rise, and in the context of a presidential election year, a recession can be avoided. We may even see an overall increase in mergers and acquisitions in the commercial printing and labeling and packaging sectors.
This makes it necessary for us to repeat our advice to owners who are preparing to sell, as well as those who would wisely view a sale as part of their long-term business strategy.
First and foremost: Don’t stop investing in the equipment and features your business needs to stay profitable. When buyers perceive underinvestment and must make up for it through post-sales, this is reflected in a decline in the issue price. If possible, the balance sheet and income statement exclude items such as personal assets and non-recurring items that could distort the company's valuation.
Pay attention to timing. Selling while your business is growing is always advisable, but waiting until growth reaches its peak may scare off buyers who are worried about the decline that will ensue. Fortunately, most owners have an innate sense of how much room they have left to grow their business. This is the sales window. Likewise, owners of companies that are attractive to financial buyers should be wary of trying to sell when they need to exit the business quickly. This is especially true for owners who have important relationships with important customers.
Financial buyers are typically not involved in the day-to-day operations of the business, and the last thing they want to be faced with is hiring a new CEO on short notice. Sometimes, a sudden departure due to personal reasons is unavoidable. However, if the seller is unable to commit to a reasonable transition period, he or she should reasonably expect this to impact the company's valuation and the size of the buyer's offer. Complicating factors aside, by the end of 2024, the industry should be on track for another strong record of mergers and acquisitions - including commercial printing.