M&A Directions: Some Light After a Long Shadow

It’s too soon to speak of a “post-COVID” printing and packaging industry, or a post-COVID anything else. The pandemic doesn’t yet have (and perhaps may never have) a past tense. But, it’s fair to think of the industry as emerging from the worst of the experience, and to consider what this might mean for buyers and sellers of printing and packaging businesses.

One of the most notable trends we’ve witnessed is — despite the pandemic — the increasing activity of private equity (PE) firms in the printing and packaging space. This is a far cry from the days when anything associated with printing was almost a dirty word to these choosy investors.

But, how times have changed. An acquisition we anticipate closing as of this writing will add a major commercial print provider to the portfolio of a private equity owner in the Midwest. This financially-motivated investor did it by submitting a winning bid ahead of any strategic buyers (expansion-minded printing companies) who may have been interested.

In a transaction for a smaller digital and offset plant in the Southeast, the same thing happened. What would have been a perfect purchase for a strategic buyer instead went to a PE investor who led the field of potential buyers with the best offer.

Private equity participation in printing industry M&As is here to stay. In some cases, the interest shown by PE investors from outside the industry exceeds what we’re seeing from strategic buyers within it. Most attractive to private equity are packaging firms — folding carton, corrugated, flexible, tag and label — and providers of specialty graphics. If your company does business in any of these areas, an overture from a PE buyer could be in your future.

Spectrum of Suffering

The damage that COVID-19 did to a printing business depended mostly on the kinds of printing it specialized in. That, in turn, hinged on what the pandemic did to the business performance of the printer’s customers. Among the worst hurt were providers of signage, banners, and display graphics, to producers of trade shows, concerts, sporting events, and other activities that had to be canceled because of lockdowns. Many were decimated as demand for their products all but dried up in 2020 and 2021.

On the other hand, some printing businesses continued to do well either because they were in a “pandemic-proof” segment like packaging, or because they managed to pivot to manufacturing products that the outbreak drove a surge in demand for. One of our Mid-Atlantic clients, for example, enjoyed a record year in 2020-2021 both by making packaging for COVID-19 test kits and by using its dye sublimation equipment to custom-decorate protective masks. But, stories like this one were exceptions and, on the whole, more printers suffered than thrived as the pandemic took hold.

At this point, we think it’s safe to say that the worst of the business contractions are over and that most segments of the industry should start to see activity returning to pre-pandemic levels. That will be good news for M&As as firms rebuild their sales, bottom lines, and valuations, becoming more desirable to buyers as a result.

But, the rebound will be uneven, with companies in some segments (for example, packaging) showing more vigor than those in others (general commercial printing). Another distinction that the recovery will highlight is the gap between firms that survived the pandemic using their own resources and those that would not have made it through without life support.

Stimulus, But Not Salvation

We’re referring to cash infusions from the federal government’s Paycheck Protection Program (PPP), first signed into law in March 2020. This provided employers with up to three rounds of financing, in the form of forgivable loans, in return for maintaining their headcounts. PPP officially ended on May 31, 2021, cutting off applications for loans under the program.

Another temporary source of financing was the Internal Revenue Service’s Employee Retention Credit (ERC) program, which applied to qualified wages paid from March 2020 through September 2021.

For some printers, PPP and ERC credits were a way to smooth a temporary rough patch, but for others, they were a life preserver that is no longer there to keep them afloat. It’s doubtful, however, that some of them could have stayed the course very much longer even if the financing had continued.

Legacy shops like these typically haven’t invested in new printing technologies or in internet-enabled solutions for keeping their customers close. They compete, for the most part, in commoditized markets. Most of their remaining value consists of the books of business they have carried for years— an asset that PPP stimulus has kept them from properly capitalizing on.

This is because their PPP life preservers have let them put off taking their opportunities to be acquired in tuck-ins, the type of transaction in which the buyer’s principal interest is in acquiring the seller’s active sales accounts. Plant, equipment, and personnel may or may not be part of the deal. For a legacy print firm that isn’t likely to be acquired as a going concern, a tuck-in is often the wisest and most rewarding exit strategy — certainly preferable to closure and liquidation, which could be the only other option.

Having no more PPP to tread water with, many of these firms will have no choice but to come to market as tuck-ins. The good news is that a pent-up demand will be waiting for them when they do. We get calls almost every day from strategic buyers in search of tuck-in opportunities, but over the last couple of years, there have been few to bring them. This will change as reality sets in and legacy owners take an overdue step toward winding their businesses down.

What to Do Now

Every owner benefits from the fact that right now, the M&A marketplace has more buyers than sellers on both the financial and the strategic sides. Owners of firms that have come through COVID-19 in good shape, on their own, are well-positioned to attract offers from multiple sources.

Owners of less healthy firms, and especially those still in business only by virtue of PPP, should take a frank look at their numbers and try to project how long it will be before cash flow and profitability can be restored. If the answer is no time soon, the time has come to plan an orderly exit through a tuck-in.

Comparing our states of mind between now and a year ago, to say nothing of two years ago, should tell us that the climate for doing business in the industry is improving. Attitudes have changed: people are willing to work around COVID-19 until it either disappears or at least recedes into the background as a threat. Concerns about inflation, cost increases, and supply-chain issues are genuine, but not overwhelming — printers and packaging firms have survived scarier economic periods than this one.

By mid-year, we will have a better handle on the state of the economy and a clearer picture of what a post-COVID printing industry might look like. But, the view at the present moment is encouraging, and we fully expect the pace of mergers and acquisitions through the remainder of the year to make the outlook even more upbeat.