Tuesday, July 20, 2010

Is there more M&A going on in the Great Recession or less?

We’ve certainly been just as active in spite of the economy, but in a different way. Initially (at the start of the recession), we were slower to pull the trigger because we were busy evaluating the chaos that was occurring. We looked at hundreds of potential transactions and didn’t do any of them. We are pretty conservative so we wanted to understand what was happening around us and to the industry in general before we made any moves. Over the past year, we’ve made several acquisitions, and most were distressed in one way or another and we had to be creative in terms of how we structured those transactions so that it was a win-win for both seller and buyer. Today, we are very active and continue to evaluate hundreds of opportunities. We expect to continue to be very active on the acquisition front this year. We still have the strongest balance sheet in the industry, and we have ample cash flow to fund our acquisitions.

As for what others are doing in our industry, I would say that there is, as a general matter, much less acquisition activity because most other buyers have to finance their acquisitions and either can’t raise the capital or simply don’t want to because they are busy licking their own wounds. Or they can't afford to take the risk that a distressed acquisition can be turned around.

What is attractive to buyers today?

I'm often asked: "What is attractive to you as a buyer?" Some thoughts:

· History of earnings growth

· Potential for continued earnings growth (notwithstanding this, we do find distressed companies to be, in certain circumstances, attractive acquisition candidates).

· History of reinvestment in the business rather than stripping out all earnings (i.e., capex has not been delayed).

· Good customer base and potential to grow sales at each

· Strong management team

· Good employees

· Reputation in the marketplace

Again, in the current economy, we have been and will continue to make acquisitions of distressed companies so it is important for owners to realize that we might have an interest in their business even if some of the above criteria aren’t satisfied.

What Determines Value?

Someone recently asked me: "What determines value?" Here's the short answer (short but still too long for Twitter):

Value is determined by many factors. In no particular order:

§ Earnings growth
§ Strength of management team
§ Customer base and concentration issues if any
§ History of reinvestment in the business
§ Reputation
§ Caliber of employees
§ Age of equipment

Current Trends

Over the last two years, the printing industry has been hit hard by the recession. Most companies have experienced revenue declines of anywhere from 15 to 50 percent, and as a result their earnings have been wiped out. In many cases, printing companies have no positive cash flow and are in various degrees of covenant default (if not payment default) on their credit lines. Many have had to restructure their equipment leases as well. Banks were initially slow to pursue their remedies because they were busy licking their own wounds, dealing with bigger problems and not eager to take any additional write offs. That is changing and banks are beginning to focus more on their printing industry credits so I expect even more company failures to occur over the next 18 months as creditors tighten the screws on their poor performers. This is bad news for printers that are in distress but good news for the survivors as excess capacity (and below cost pricing) will be wrung out of the system. What this means for the M&A landscape is that there will be even more opportunities for white knights to rescue distressed companies, something we have been doing quite a bit of.
Completed another transaction last month. Hickory Printing Solutions in Conover and High Point, North Carolina. Press Release is below:


Conover, NC and High Point, NC – June 1, 2010 -- Consolidated Graphics, Inc. (NYSE: CGX) announced today that Hickory Printing Solutions, a Consolidated Graphics company, has acquired certain assets of The Hickory Printing Group headquartered in Conover, North Carolina. Hickory Printing was founded in 1917 and grew to be one of the largest commercial printers in the southeastern United States. Terms of the transaction were not disclosed.

Hickory Printing Solutions offers web and sheetfed printing, mailing and fulfillment, variable printing, interactive services and packaging and operates out of two facilities located in Conover and High Point, NC.

Commenting on the acquisition, Joe R. Davis, Chairman and Chief Executive Officer of Consolidated Graphics, Inc., stated, “Hickory Printing Solutions offers first class quality and service to its customers. With the additional resources of Consolidated Graphics, including the world’s largest and most sophisticated digital printing network, behind it and its dedicated employees, Hickory Printing Solutions will continue to exceed every customer expectation.”

Stephen Patton, former President of Electric City Printing, a Consolidated Graphics company in Williamston, SC, is the President of Hickory Printing Solutions. Mr. Patton commented, “I am looking forward to applying all that I have learned at Consolidated Graphics to help Hickory Printing Solutions continue its world class printing reputation.”

George B. Glisan and Jeffrey A. Hale, formerly CEO and CFO, respectively, of The Hickory Printing Group have been hired to serve as CEO and CFO of Hickory Printing Solutions. Mr. Glisan said, “I have always admired the Consolidated Graphics business model and am looking forward to having the financial strength and resources of Consolidated Graphics behind us.”

Consolidated Graphics, Inc. (CGX), headquartered in Houston, Texas, is one of North America’s leading general commercial printing companies. With 70 printing businesses strategically located across 27 states, Toronto, and Prague, we offer an unmatched geographic footprint, unsurpassed capabilities, and unparalleled levels of convenience, efficiency and service. With locations in or near virtually every major U.S. market, CGX provides the service and responsiveness of a local printer enhanced by the economic, geographic and technological advantages of a large national organization.

Consolidated Graphics’ vast and technologically advanced sheetfed and web printing capabilities are complemented by the world’s largest integrated digital footprint. By coupling North America's most comprehensive printing capabilities with strategically located fulfillment centers and industry-leading technology, CGX delivers end-to-end print production and management solutions that are based on the needs of our customers to improve their results. For more information, visit www.cgx.com.