Tuesday, May 30, 2017

Show Me the Money: Why Strategic Buyer Financial Disclosure Is Normal in Printing Industry M&A and What to Do About It

Imagine you are negotiating to buy a house and the current owner, the seller, wants to know all your personal plans for anticipated remodeling and also expects to be privy to how much profit you expect to make when you eventually resell the house. Residential real estate practice would consider this an absurd request, instantly denied. 

Typical residential real estate buyers may show a financing commitment or similar proof of financial means, but no one is looking over the buyer’s shoulder questioning assumptions about improvements or expense reductions to operate the house. Beyond this basic qualification of ability to complete the purchase, the seller has no reason to pry into the buyer’s affairs because the premise of residential real estate is that the seller will be out of the picture immediately upon the buyer paying the agreed-upon price in full at closing. The seller will no longer be a stakeholder in the house, thereby limiting the nature and scope of questions that are appropriate to ask. Sure, cooperative buildings require greater financial due diligence, but that’s because the prospective buyer is essentially a partner in the building itself.

Why do Seller’s Expect Buyer’s Financial Information?

But in the world of strategic M&A among privately-owned print, mail and graphics communications companies, seller due diligence into the buyer is hardly an exception. In fact, recent client matters here at GAA have involved various levels of buyer disclosure with the sellers asking:

1) What is the buyer’s succession plan, given the age of the partners?

2) Does the buyer’s bank agree with projections for consolidation savings which under-pin the required debt service?

3) How much working capital will the buyer inject into the entity to support the revenue growth resulting from the “tuck in” of the seller’s book of business?

All good questions. Faced with these probing questions and others of similar intrusion, why would a buyer need or want to open the window on themselves when all they want to do is consummate strategic growth by acquisition? The answer primarily lies in the buyer’s choice of currency.

Payments in the form of earn-outs, such as royalties, commissions or contingent notes, all shift future business performance risk from the buyer to the seller and effectively make the seller a stakeholder in the buyer’s enterprise. Additional grounds for the seller to conduct due diligence and assess the buyer’s viability arise when the seller owns the building which will be leased to the buyer or if the seller will be employed by the buyer post-closing.

It is the choice of the buyer’s “currency” in the form of an earn-out, therefore, that causes the seller to ask for verification, assurance, and comfort that the buyer is a viable entity. It’s reasonable that the seller, in accepting the earn-out provisions, wants to know that the M&A plan is feasible and that the risk inherent with the deal structure is tolerable from their point of view.

An example occurred this week when a GAA client, a strategic acquirer, upon receiving the seller’s information request sent me an email asking “Huh, aren’t WE the buyer?” Of course, the buyer’s advisor can push back on the seller’s excessive request, which I did, however some disclosure was warranted. The buyer that is reticent to disclose financial information can express willingness to use more cash, which reduces the seller’s push for disclosure (“why do you care, our client is just going to write a check and be done with it?”)

How about All-Cash Deals?

Conversely, if the seller and buyer agree on a price that will be paid 100% in cash at closing, and there are no other post-closing obligations, then arguably there’s no cause for disclosure except to give the seller assurance that the deal will close. The seller is not asked to become a stakeholder in the buyer’s future success.

The strategic acquirers among my clients know that it’s never so simple. R
arely does the seller have a realistic firm price expressed in black and white dollars. More often than not, the buyer (and advisors) have to work through layers of Q&A and issues to get to the point where there’s clarity on “price” and “structure.” And in today’s market for printing and related companies, “structure” usually involves some form of risk-based consideration such as royalties, earn-outs, contingent notes, etc.

Planning for Buyer Financial Disclosure Increases the Likelihood of Success
In serving as M&A advisor to a wide range of qualified buyers over the past 25 years, I frequently recommend sharing financial statements early in the courtship process to gain the seller’s trust and demonstrate that the buyer is a solid entity and would be a good M&A partner. Financial statements showing financial viability are ideally supported by a good credit rating and positive reputation among trade suppliers, particularly paper houses and finishing companies.

I also encourage buyer-clients to speak with their bank well in advance of actual financing requests to alert the bank that M&A is a real possibility and to ascertain the bank’s general receptiveness to funding an acquisition. A buyer that follows these recommendations will have its house in order, be confident in their negotiations and demonstrate commitment to the seller.

On the seller-side of the table, one tactic to manage buyer inquiries about financial and business details is to ask for mutuality: “If you ask to see mine, expect me to see yours.” Most credible buyers will respect this request for mutual disclosure, to a point.

The main take away for graphic industry M&A participants is to be sure to expect at least some level of two-way financial disclosure. The days of the distressed seller showing up at the buyer’s door with a book of business and no expectation for anything (no cash, no financial commitment, no stakeholder status) are in most cases behind us. M&A opportunities are more likely to be consummated by buyers who are serious and maintain timely and accurate financial and business information that can be shared with potential sellers at the right time.


 John Hyde

Thursday, March 9, 2017

Imagine Losing Money for Ten Years in a Row (and still operating)!


It’s a famous example of a large public company that defied gravity - Trans World Airlines (also known as TWA for those of us old enough to remember the brand) famously posted ten consecutive money-losing years and continued to operate, essentially living off capital generated from its once successful legacy enterprise. No small company could ever lose money and survive for an extended period measured in decades! 

It’s a fact - small and mid-sized privately-owned companies are more vulnerable to changes in business condition and deteriorate much faster than big public companies. 

Private Companies Spiral Down Quickly 

After some very tough years for the printing and related graphic communication industries, many companies that we visit are enjoying solid financial results, dare we even say “robust” in select instances. However, we are still seeing our share of companies that for one reason or another are declining or could even be classified as distressed. These companies represent opportunities for buyers that can tuck-in the sales of the struggling entity, adding valuable new customers and capabilities. For the owners of the troubled company, the best course of action is often a non-bankruptcy orderly liquidation process in which the goal is to maximize residual value while transitioning from ownership. As an advisor to entrepreneurial and family businesses, following are some of my reflections on the downward spiral that owners of privately-owned companies may find themselves in. 

Nowhere on the broad corporate map do businesses experience more “ups and downs” than in the printing, mailing, and graphics communications industry. Companies of all sizes are vulnerable to sudden downturns, often due to customer concentration. It’s not uncommon for one or two key customers to represent 20% or more or total revenues. The loss of one or two key customers within a short-time period derails the train faster than the owner can adjust. One of our current clients, a very successful printing company with revenues in excess of $50 million, went from record profits in 2015 to significant operating losses after two top customers were lost - through no fault of the company. The company now has no “E” in its EBITDA and instead of being a buyer is now a seller. 

Customer concentration risk is often magnified by the lack of a strong bond with customers, an endemic condition in the printing industry. Services such as data analytics or long-term contracts create “customer stickiness” and bind customers to a printer and provide “pause for thought” when problems arise. Without those “hooks,” customer relationships in our industry are almost always contingent on ongoing satisfaction of immediate and short-term needs. Customer concentration and the short-term scorecard of satisfaction add up to enormous pressure to keep ahead of the downward spiral once it begins. Even the healthiest of companies have owners who are worried about future business risk. A “healthy” buyer client of ours ($9 million annual revenues) recently sat down for an M&A discussion with a “troubled” seller ($3.5 million annual revenues), saying, “it very easily could have been us on the other side of the conversation.” 

Three Warning Signs of Trouble Ahead 

Layoffs: A common perception is that layoffs indicate financial trouble; however, in the words of one of my clients, “it’s just the opposite: we WERE in trouble funding payroll we couldn’t afford, now, after the layoff we are okay but the perception is the reverse, that we are now in trouble but we were fine before.” A very low revenue-to-employee ratio is a sign that management has not made the necessary cuts commensurate with top line declines. 

Expensive Financing: A privately-owned company’s status on the financing food-chain is a strong indicator of relative health. Nothing is better than a company having its own capital in adequate supply, but the corner bank is the next best thing. From there, the choices increase in cost, risk, and requirements, ranging from finance company asset-based loans, credit cards, factoring, and family money. Family loans can be either a blessing or a curse, depending on family dynamics. For mailing companies, a line item called “Postage Payable” merits scrutiny to ascertain whether the ownership is using customers’ postage money for operational funding, a clear breach of the expectation that postage money is solely for mailing the customer job and nothing else. Not paying payroll or other taxes on time is another form of “financing” and a sure sign of trouble ahead. 

Late Payments: Falling behind on payments on loans or to suppliers are indicators of trouble, however this may not signal the end or require a bankruptcy filing. This is one area where small private companies have much greater staying power than the owners may realize. Creditor problems that do not yet affect customer satisfaction may be negotiable if arrangements are carefully planned and executed with honest disclosure to the creditors. The company may recover, or its remaining life span may be measured in years, providing time and resources to stabilize value or in some cases minimize owners’ losses. 

How do you assess the rate of decline? 

There’s no one answer, but it’s safe to say that the acceleration of customer attrition happens “faster than the ownership thinks.” Or more accurately stated, “faster than they REALIZE it.” Declining revenues can make the printing company owner FEEL BETTER because there is more cash generated from AR collections in a downward-trending business. Remember, growth absorbs cash for AR and increased payroll; revenue decline creates false security because there’s temporarily more money around. The net effect is that while customers are walking away, cash is coming in, the owner misreads the situation and attributes the revenue decline to “a temporary slow-down” or “the economy stinks.” It’s worth noting that the rate of deterioration rapidly accelerates closer to the end. Think of water going down the drain, it’s faster at the end. 

Three Factors Signaling the Company May Be Beyond the Point of Repair 

Daily Cash Juggle Leads to Worse Problems: The hallmark of troubled printing companies is the daily cash juggle to free up money for COD paper purchases, critical service for digital devices, and “must pay” utilities. Shorting payroll or diverting postage money are late-stage indicators as well. The sudden departure of a perceived bedrock core employee (e.g. a star sales person) is a strong warning sign of imminent demise. 

The Place is a Dump: A site visit to a failing printing company can shed light on whether the business is near the end. There is a quiet stillness in the air, the shop is disorganized but not because of robust activity. Magazine subscriptions in the lobby terminated long ago and the issues lying around are two years old. Normal housekeeping is not being done and personal supplies, such as bathroom soap, are not where they should be. Employees avoid eye-contact, preferring to block out the visitor. Basic building care such as lawn maintenance is obviously skipped. An experienced visitor literally can feel that corporate death is imminent. 

Customers Start Feeling the Pain: It’s hard enough to meet customer requirements when times are good, but when a cash shortage impacts paper procurement or outsourced finishing work, customer retention takes on an added burden with no room for error. At this stage, when deadlines are missed and quality suffers, we expect the remaining life span to be measured in only a few months, weeks or even days.

Can Deterioration Provide Impetus for Positive Change? 

Yes. It’s fair to say that even the strongest printing companies have faced serious challenges at one time or another. Longevity is a testimony to the entrepreneur’s ability to reinvent and restructure when others transition out of ownership. One of my clients is proud to have never lost money in 40 years but his company reinvented itself several times along the way, sometimes within eye-shot of the proverbial cliff. 

The one advantage that privately-owned companies maintain over big public companies is the entrepreneurial spirit of the owners. There is nothing more resilient that an owner who gives up everything to make it work. For those strong-minded individuals, business deterioration can be a call for rejuvenation and restoration. That’s the sunshine behind the clouds, and I’ve seen it and assisted those owners many times in our industry. 

 John Hyde

Postscript: TWA finally did disappear as an iconic American brand, having been acquired by American Airlines in 2001.

Sunday, December 18, 2016

Big Wall Street Deals Get Done Faster Than Small Business M&A: Here’s Why

How is it possible that corporate giants AT&T and Time Warner reach an agreement on the terms of a merger in only two months while many small business owners languish over deals for six months, nine months, or even years?

Having cut my teeth as a young attorney at mega law firm Chadbourne & Parke some thirty years ago and now in my 26th year of private consulting practice focused on family-owned and entrepreneurial companies in the printing and graphics communications industry, the announcement in October that AT&T and Time Warner agreed on an $85.4 billion merger stoked memories of my upbringing in corporate M&A law: due diligence that left “no stone unturned,” rigorous attention to detail on every technical issue, and voluminous legal documentation meticulously drafted and presented.

With all what goes into the deal-making process, it’s counter-intuitive that the larger deals with more money, greater public scrutiny, and massive complexity are often achieved faster than what looks like smaller-easier-quicker-quieter M&A transactions. The basics of the M&A process are very similar regardless of size of company. The journey is much the same for companies on Wall Street and Main Street, as they go from “leadership vision” to “M&A concept” to “exploring opportunities” to “preliminary negotiations of price & structure” to “letter of intent” to “definitive legal agreements” to “closing.”

So why is it that the small business owners who dot the landscape of America in general and the printing industry in particular are slower than their big corporate brethren when it comes to M&A? Here are three observations as to why big corporations are able to move quickly on M&A deals. These observations also serve as guide-posts for owners of family business and entrepreneurial companies who want to go faster with M&A:

Timely and Accurate Financial Reporting Enables Speed in M&A


The management of companies whose shares trade on public stock markets must comply with stringent legal requirements on financial reporting. This forces management to make accounting a priority. “What you’ve got to keep in mind is that the accounting for public companies is great, making analysis simpler than you’d imagine,” commented Rick Mager, Managing Director, Graphic Arts Advisors, LLC. By comparison, private company owners are often more likely to engage in tax minimization strategies and planning that saves money on income taxes but hinders efficient M&A financial analysis.

Advice to owners: have your house in order with timely and accurate financial information that is M&A-ready.

M&A is Just Business

When ATT’s Randall Stephenson and Time Warner’s Jeff Bewkes chatted over lunch in August, neither was considering the succession planning scenario of giving the business to his eldest child. The notion that family implications could affect M&A decision-making at that level is simply ludicrous (however, not unheard of, such as with Viacom and some select other closely controlled large public companies). Removing or significantly minimizing family implications is one sure fire way to speed up small company M&A.

Advice to owners: speak with your family in advance of opening the door to opportunities and be candid about the business and your situation.

Be Prepared for When Opportunity Knocks on Your Door

After ATT’s Randall Stephenson decided to move forward and called his advisors to help on the Time Warner deal, it’s not as if his team had never considered growth by strategic acquisition; you can bet that M&A is an integral part of both companies’ corporate planning, whether it be acquisitions or sale of the company itself. Conversely, many small private companies think of M&A as an after-thought, to be looked at only “when we’re ready to do something.” By contrast, well-managed public companies are always ready to explore M&A opportunities. It’s part of what they do; they know the questions to ask, the answers that require more digging and those that don’t. They have their own house in order and are prepared to survive rigorous scrutiny from potential M&A partners. The big public companies also think nothing of having meetings with colleagues or competitors while small private companies often feel intimidated by having visitors that will raise eyebrows among employees. One successful client of mine that I’ve known since the mid-1990s said it best: “I always run the company as if it was for sale.”

Advice to owners: demonstrate the willingness to put your company under the microscope of a strategic M&A transaction on a moment’s notice.


 John Hyde

Thursday, September 8, 2016

The Sale of DG3 to Resilience Capital Partners

DG3, a significant player in the NYC metro, national and international market for commercial and financial printing, has entered another phase of its storied existence of acquisitions, going public, sale of the company, management buyout, return of the founder, sale to private equity and now a secondary sale to private equity and special situation fund Resilience Capital Partners.

This latest transaction for DG3 offers the opportunity to look back at the company’s history, provides relevant insight into today’s market and suggests possible prognostication for the future. As a professional involved in several hundred M&A transactions in the printing and related industries, I view the announcement that DG3 was sold to Resilience Capital Partners from a three-fold perspective.

For readers who don’t know DG3 (Diversified Global Graphics Group), the company is considered by many, including this author, to be a leading company with strong management, significant market presence, and a consistent M&A presence. It has ranked in the Printing Impressions Top 400 for many years, most recently listed as having $140 million annual revenues (self-reported).

Historical reflection


Let’s not forget that DG3 traces its origins back to legendary entrepreneur Michael Cunningham, who pulled together a series of ground-breaking roll-ups in the 1990’s to transform his company from a small financial print broker to the multinational Cunningham Graphics International, with offices in New York City, London, Hong Kong, as well as a large manufacturing facility in New Jersey. At the dawn of the dotcom boom, the company joined in the party and went public on the NASDAQ.

In a move now considered to be perfect timing at the height of the market in June 2000, Cunningham shocked the printing industry by selling to payroll processing company ADP which also processed millions of public company annual reports and statements. In a series of transactions from 2004 to 2006, a management group bought the business back from ADP, one piece at a time. They re-tooled the company with various well-executed strategic initiatives that put the company to the forefront of technology, creative services, print production and distribution in specialized niches such as pharmaceuticals and investment banking. In 2007, Michael Cunningham (now Dr. Cunningham) pulled a “Steve Jobs” and returned to lead the transition of the company, changing the company name to DG3.

The next year DG3 received a major equity investment from a private equity firm, Arsenal Capital Partners. Under Arsenal’s ownership, the company has completed no less than six acquisitions and invested in the transformative high speed continuous feed inkjet printing technology.

Current relevance


The announced sale of all of the company’s equity interests to a private equity fund is relevant because it shows that size matters. Based on Resilience Capital Partners’ criteria that the fund seeks “special situations,” as well as the investment banker chosen to advise on the transaction, SSG Capital Partners, we can infer that DG3 was leveraged and needed to bring in fresh equity to rebalance the capital structure.

My experience shows that smaller and less robust entities than DG3 almost always are unable to attract new money from professional investors. Most often, smaller entities transition from private ownership via a sale of intangibles/book-of-business. If excessive debt is part of the equation, the transaction will involve a non-bankruptcy debt restructuring to properly unwind the assets and liabilities. The scale of DG3, and its impressive market presence and capabilities, was clearly sufficient to attract institutional investment and overcome impediments that might prevent a smaller company from surviving as a stand-along entity.

Future prognostication


In recent years, other major firms, such Sandy Alexander, also based in New Jersey and with multiple offices nationally, have survived various financial challenges and successfully restructured to remain independent, competitive and poised for growth as the industry consolidates further. (Sandy Alexander announced a management buyout in July, 2013.) It’s encouraging to see these leading printing companies reinvent themselves, in some ways serving as a model for their smaller brethren. It’s my observation, based on The Target Report and my own personal experience, that the pace of plant closures and orderly liquidations has slowed. It may be illustrative that if the “big guys” can make it, so can the “little guys” as a level of stability returns to the market for commercial printing and related services.

 John Hyde

Monday, August 8, 2016

Paper Distributors Consolidate

It’s no surprise that Lindenmeyr has recently announced that it had acquired Graphic Paper, a paper distribution company based on Long Island, New York. According to The Target Report, there was significant M&A activity in the paper industry during 2015, of which seven transactions involved the acquisition of formerly family-owned distributors of printing papers. Especially notable was the acquisition of Gould Paper by global paper distributor Japan Pulp and Paper Company. Lindenmeyr itself was active earlier this year, having acquired the C.J. Duffey Paper Company, a Midwest paper distributor.

For financially distressed printing companies, there was a time when paper companies such as Lindenmeyr Munroe and Graphic Paper held all the cards: the power to determine whether and how those cash-strapped printing companies could obtain critical shipments of paper. These distributors trafficked in a closed loop of fact, rumor, and on-site reconnaissance that gave them a leg up on other trade suppliers searching for vital clues about a printing company’s chances for survival. Their decisions, some of which were effectively made in concert with their paper supplier competitors through credit organizations such as The Paper & Allied Trades, had ramifications for printing company owners far and wide.

As an advisor to owners of printing companies, I have heard both sides of the story; paper distributors have legions of fans and detractors. The distributors’ credit decisions helped some printers to survive tough times and return to profitability as the commercial printing market has stabilized. Others told me that they blame the paper guys for “keeping the boat afloat” of money-losing print shops whose doors should have closed BUT FOR the generous supply of paper on loose credit terms. The result, they say, is the chronic hyper-competitive pricing endemic in the commercial printing industry.

From my perspective having negotiated hundreds of acquisitions, orderly liquidations and debt restructuring cases over the past 25 years, I have nothing but respect for both Lindenmeyr and Graphic Paper. They have been professional and effective in making difficult decisions under the backdrop of a declining industry. It is with somewhat of a heavy heart that we say goodbye to one of those paper distributors, Graphic Paper, that has helped many printers in the New York metro region.


 John Hyde