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