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.