In-Focus

OPEN LETTER TO OWNERS AND MANAGERS OF PRINTING INDUSTRY PARTICIPANTS

March 2017

Dear All

Mergers and acquisitions will likely always feature prominently in the printing industry as it does in other ‘low barrier-to-entry’ sectors characterised by a large number of relatively small, predominately privately owned businesses.

I founded the business which is now MBA Global in 1989. My first clients were involved in the automotive aftermarket and offset print sectors. Having led many transactions in these (and numerous other) industries in the 27 years since, I have reached several conclusions, one being agreement with the classic axiom “the more things change the more they stay the same.”
Some recently published articles have addressed the issue of M&A activity in the print industry. Here, I would like to offer my views pertinent to this subject and begin by pointing out there is a difference between a merger and an acquisition (takeover). The differences should be considered from two perspectives, from that of the ownership group and from the perspective of other stakeholders including employees, customers and suppliers.

Where listed companies merge, the consideration paid for one company will be satisfied with the issue of shares in another. In private company situations a new holding company can be incorporated and an issue of shares in ‘Newco’ will be made to the ownership groups of the merged businesses. Conversely, a takeover would usually involve a cash payment (some of the payment may be deferred and contingent on one or more conditions-subsequent being satisfied) made by the acquiring company to the shareholders of the target company. Note: So as to minimise risks to the acquirer and reduce legal complexities for the seller, many transactions are structured as asset sales rather
than share sales.

Most significant impact on management and staff will result from the motivation for and structure of the transaction. There are many sound reasons why an M&A transaction is completed.

They include:

  • Investment in a successful business
    Companies can be acquired because they are well managed, profitable and have desirable tangible assets and intellectual property. In these instances it is likely minimal change will be made to the business.
  • Vertical Integration
    The technical definition of vertical integration is when a company expands its business into areas that are at different points on the same production path thus increasing the services offered from in-house capability.   For example an offset printer acquiring a pre-press business or at a different point of the supply chain, a finishing and bindery business.
  • Horizontal Integration
    The acquisition of additional business activities that are at the same level of the value chain is defined as horizontal integration. Examples of horizontal integration include the elimination of a competitor by taking it over or interstate expansion achieved by the takeover of or merger with a company offering the same or similar services.
  • The acquisition of a client base
    More often than not the acquisition of a client base will involve the takeover of a competitor thus an example of horizontal integration. Nevertheless this strategically sound alternative to generic growth sometimes includes a business offering services to its clients complementary to those of the acquiring company.
  • As a method of updating equipment
    An alternative to buying new equipment on its own is the acquisition of a target which already owns similar (near new) equipment. This strategy can generate one or more added advantages over the purchase of the equipment alone including: the addition of a client base, trained staff and the elimination of a competitor.
  • As a method of bolstering personnel
    The acquisition of a target company which has an experienced team - staff and/or management – in areas where the acquiring company lacks desired skills or strength. Focus here need not be restricted to sales and sales support but also to any area of production, print management or distribution.
  • The realisation of synergies
    The achievement of material cost savings can be very substantial following the merger with or acquisition of a business offering similar or complementary services. Improving plant capacity utilisation is clearly an area of focus but in addition to this, significant savings can be generated in the administration, accounting, sales, warehousing and dispatch functions.

Mergers and acquisitions are proven, legitimate strategies adopted to achieve business objectives. Yes, as has been suggested in some recent articles, not all M&A transactions prove to be successful. However contrary to what has been written, acquisitions do not fail because ‘too much has been paid’ for the target.

For a start – how much is too much? Further, what is the measure of success and of failure? Not all benefits derived from an M&A transaction are as quantifiable as others in the same way it is not always easy to determine the level of success of every dollar invested in marketing.

Independent valuations can be commissioned to assist in the determination of ‘fair value’. The individual share of a post-merger enlarged business will be based largely on the values of the assets of each business (pre-merger) relative to those of the other. Whereas in the case of takeovers, the only assets which need be valued are those of the target. An important consideration when commissioning valuations will be the basis on which the valuation is prepared. This is relevant for all assets the subject of the transaction including intangible assets. Equipment can be valued a number of ways which will result in materially different numbers. Likewise, intellectual property and goodwill can be valued using different methodologies again resulting in vastly different values being presented.

The ‘value’ of a business to the buyer will differ between buyers as it will for different sellers.  A professionally prepared, arms-length valuation will place a number on the assets of a business which may be termed ‘fair value’. Yet the price buyers are prepared to pay will vary from buyer to buyer.

The difference can be significant. This is so because the price one particular buyer is prepared to pay will reflect factors unique to it. Issues are many and varied and include: what the target brings to that buyer, suitability of the timing, cost of and availability to capital required to fund the acquisition, resources of the buyer it has available to commit to the acquisition and its implementation, size of the target relative to the buyer, the buyer’s assessment of the risks the acquisition may impose on it, etc. etc.

Similarly the price sellers are prepared to accept is likely to differ based on considerations personal to them. For example, shareholders of a company who are employed by the business may well want a different value before being persuaded to sell than other directors wishing to retire or those shareholders not involved in the day to day management of the business. The way the transaction is to be structured, post settlement involvement of the seller, warranties required to be offered and the acquirer’s intentions for the business and its employees, are just some of the considerations which will impact the price a seller will accept.

The seller may wish to weigh up alternative investment options before deciding whether or not to accept an offer. These must be considered unemotionally and logically, which reminds me of an experience I had some years ago. I was asked to advise the chairman of a company in which he held the majority stake. The company’s shares were listed on the exchange and had performed poorly over several years. In fact the share price had halved – roughly in line with the reported profits of the business. He didn’t want to sell and his reasoning was this. “Stuart, where else could I invest and receive an 8% fully franked dividend yield.” My answer was simple. “Bill (not his real name) unless you’re confident your profits will turn around immediately the Board must slash the dividends it declares. Further, the only reason your dividend yield has been so high is because your share price has halved. Recommend acceptance to your shareholders and follow your own recommendation.”

In my experience successful corporate acquisitions boil down to the following key factors:

  • clearly define your objective(s)
  • do the research
  • plan carefully
  • do the due-diligence
  • communicate with the necessary stakeholders at the appropriate times
  • prepare your business plan
  • negotiate well
  • structure the deal so as to maximise the outcome to the seller and minimise the cost and risks to the buyer
  • where the transaction involves the introduction of additional shareholders (e.g. where two or more businesses merge) it is imperative to have a shareholder agreement drawn up
  • implement with purpose
  • use professional and experienced advisors

Where more than one shareholder is involved in the ownership of a business it is essential for there to be an understanding reached between them in relation to critical issues central to the ongoing direction, operations, management and conduct of the business. This is especially relevant where shareholders have come together as a result of a merger of two or more businesses. Once agreement is reached on the several areas of focus, the understanding should be formalised and executed by all shareholders as a shareholder agreement or deed. As part of the process it is vitally useful to prepare a financial and operational business plan which can be appended to and form part of the deed. An outline of the issues commonly addressed in shareholder agreements can be found in the private access section of MBA Global’s website at www.mbaglobal.com.au

The post completion implementation of acquired or merged businesses will have a vital bearing on the level of success of the transaction. Critical tasks here will be the ‘welcoming’ of new team members and the communication with customers and suppliers of both businesses. The clear communication of opportunities for and expectations of employees new to the business will make the process less stressful and more productive for both management and staff. The cultures of each business will differ and it will be important to foster a positive culture from the outset.

Earlier this year the Harvard Business Review published an article nominating six components contributing to a great corporate culture which should be communicated to new employees. The components are: Vision (perhaps contained in the company’s mission statement); Values (guidelines for expectations governing behaviour); Practices (policies and operating principles of daily life in the business); People (who share the company’s core values and possess the willingness to embrace those values); Narrative (all businesses have a unique story which can be crafted into a narrative thus becoming a core element in culture creation); and Place (whether geography, architecture or aesthetic design – place impacts values and behaviours of the people in the workplace.)

Stuart Mears is the founder of MBA Global.  MBA Global is a boutique corporate advisory specialising in equity related transactions.  Stuart Mears has successfully managed many transactions for buyers and sellers of printing businesses in addition to the other services provided by MBA Global CLICK HERE.