Reports of an M&A Slowdown Are Off the Mark — Here’s Why

There was some talk last year that the pace of mergers and acquisitions in the printing and packaging industries was starting to slow down. Frankly, we thought the same thing might be true around the beginning of 2023, as we watched rising interest rates and fears of recession dampen the enthusiasm of many business owners and would-be buyers.

We all remember too well that financial investors and lenders had pretty much blackballed printing and packaging following the Great Recession of 2008-2009 — a reminder that if the economy as a whole takes a severe nosedive, our industries typically are in for a rough ride.

None of that came to pass in 2023, and we don’t foresee it happening this year. This is largely due to the business model of financial buyers, which has proven to be consistently sound and profitable when applied to printing and packaging companies.

Financial buyers are investors: private equity (PE) groups that use their capital and borrowed funds to create business entities they intend to sell for profit later.

The strategy begins with acquiring one company as a “platform” to which others are added until the desired footprint and economies of scale are achieved. The process usually takes three to seven years, at the end of which time the conglomerated business is “flipped” to a new owner with a solid ROI for the seller.

Steady as She Goes
To reach this point, PE investors strive to stick to the plan of building up the business through acquisitions around the platform, which is exactly what most of them continued to do with their printing and packaging holdings throughout 2023, regardless of the bigger economic picture. This helped keep the pace of M&As from slowing down significantly last year, sustaining a momentum that should continue to stimulate dealmaking in 2024.

Owners of packaging companies — particularly manufacturers of flexible packaging and labels — are the big winners in this seller’s-market scenario. This is primarily because they are growing. Growth drives buyer interest, EBITDA multiples, and selling prices for owners ready to field offers from financial buyers.

Right now, approximately a dozen PE investors are competing with each other to acquire flexible packaging and label producers, sometimes at multiples of EBITDA that can only be called astronomical compared to what we see in sales of other kinds of print-based businesses. As elevated as they are, the multiples often are still below those of manufacturers in non-print sectors, making them all the more attractive to bargain-seeking PE players.

Other segments of packaging, though perhaps not as sky-high in terms of EBITDA multiples, also are very strong and continue to look good to PE investors: folding cartons, pharmaceutical packaging, large-format litho laminate labels for corrugated containers, and industrial labels. All of these categories have a lot of potential for PE because of the strong customer loyalty their producers enjoy.

Strategic Buys Still Matter
We shouldn’t overlook participation by strategic buyers in the M&A market for labels and packaging. Strategic buyers seek to purchase companies like their own with long-term growth as the goal. Acquiring a similar company spurs growth by bringing in new customers, broadening the buyer’s geographic reach, or adding products, services, and capabilities the buyer does not have.

These buyers know that a well planned and executed strategic acquisition creates value for everyone concerned. While they weren’t as active on the label and packaging front as financial buyers were last year, their presence remains key to keeping the pace of M&As healthy and strong.

Given all of these trends, our view is that M&A activity in 2024 should be at least as vigorous as it was in 2023. No one has a crystal ball for the economy. Still, there’s reason to be optimistic that interest rates may come down, taxes won’t increase, and a recession can be avoided against the backdrop of a presidential election year. We might even see an uptick in M&As across the board, in general printing as well as in labels and packaging.

This makes it worth repeating our recommendations to owners ready to sell and those who wisely see selling as part of a longer-term business strategy. First and foremost, don’t stop making investments in the equipment and capabilities the business needs to stay profitable. When buyers perceive underinvestment that they will have to make up for post-sale, they will reflect that concern in a decreased offering price.

When possible, keep balance sheets and income statements free of things such as personal assets and non-recurring items that could distort the valuation of the company.

Focus on timing. It’s always desirable to sell while the business is growing, but waiting until growth has peaked can scare off buyers worried about a slippery slope to follow. Fortunately, most owners have an innate sense of how much room they have left to grow the business. That is the window in which to sell.

Make Haste Slowly
Along the same lines, owners of companies attractive to financial buyers should be wary of trying to sell at a point where they would need to make a quick exit from the business. This is especially true for owners with critical relationships to key accounts.

Financial buyers typically don’t involve themselves in the day-to-day running of the business, and the last thing they want to be faced with is hiring a new CEO on short notice. Sometimes, sudden departures for personal reasons are unavoidable. But, if the seller can’t commit to a reasonable transition period, they should expect this to impact the valuation of the company and the size of the buyer’s offer for it.

Complications aside, the industry should come to the end of 2024 with another strong track record of M&As behind it — particularly in labels and packaging. At New Direction Partners, we’re always eager to discuss the outlook and the opportunities with buyers and sellers alike.