Mergers and acquisitions: It’s complicated – very complicated

Mergers & Acquisitions (M&As) seem to be happening more and most frequently in our industry. Witness some of the most recent and most important: Paper Excellence of Richmond, BC acquiring Catalyst Paper; Fujifilm buying control of Xerox for $6.1 billion (still being litigated); EFI acquired by an affiliate of Siris Capital Group for $1.7 billion cash; the official completion of the merger of Goss International and Manroland Web; and Cenveo’s first M&A transaction (since emerging from bankruptcy) with the sale of its label and paper-receipt businesses to Iconex. Commercial printers are acquiring packaging firms, offset press OEMs are purchasing finishing equipment manufacturers, paper mills are purchasing additional production facilities to expand their existing markets – the list goes on. Obviously the executives involved in these transactions see major complementary synergies between their two companies, and feel the eventual outcome will be a win-win for everyone concerned. But in actual fact, it seldom turns out that way.

The print industry’s M&A expert

“The reality is that about 75% of mergers and acquisitions (M&A’s) in the printing industry fail,” said Jay Mandarino, President and CEO of CJ Graphics and the CJ Group of Companies. One of the most sought-after consultants and M&A facilitators in the printing and graphic communications industry today, Mandarino’s CJ Group comprises no less than 36 companies, of which over 70% were successful acquisitions. His most recent acquisition was ACME Ticket, an industry leader in the ticket-printing business for over 60 years with clients such as MLB, NHL, OHL, WHL, QMJHL and other professional sporting events in Canada and the US. He’s been called upon time and time again to not only speak on the topic, but get involved personally as an expert consultant and key facilitator helping out with approximately 10 to 20 deals a year. In fact, Mandarino will often recommend other M&A experts to get involved – so there’s no perceived bias on his part.

These acquisitions are also a major part of his own personal success story. Mandarino began as an independent print broker in 1979. Today he heads one of the largest privately-owned and most award-winning commercial printing and communication organizations in North America. In fact, it’s rare that a year goes by that CJ Graphics doesn’t win major industry awards for the exceptional work it produces both locally and around the globe. He also recently moved into an expanded new production facility in Mississauga, Ontario while spending over $8 million in renovations to make it a state-of-the-art facility. But most importantly, you’d be hard-pressed to find anyone more versed in navigating complicated M&A transactions in today’s high-pressure printing industry than Mandarino.

Whether a company is valued under $1 million or over $10 billion, he’s seen it all. And while Mandarino has indeed “seen everything,” he points out that every deal lately comes with new challenges and opportunities, and he’s “learning something new with every deal.”

It’s complicated

Consider some of the questions that must be answered in any M&A transaction, not the least of which is a complete and objective financial analysis before proceeding. For example, is the move being led from the top down and are employees buying in 100%? How will people in both the merging company and the company being absorbed react? Will there be staffing cuts? Which previous company culture will dominate the new entity? How will the merger affect each department in each company? Have all banking and financial arrangements been approved? And what about resolving health benefits and other HR issues? Then you’ve got sales. Are they increasing, stagnant or decreasing, and in which specific areas? “Don’t be afraid to hire an outside forensic accountant as it’ll be the best investment you’ll ever may make,” Mandarino insists. “I remember a deal we were all excited about. It appeared to have huge upsides in tax gains and profits until we hired an outside forensic CA – who actually showed us that there were, in fact, many hidden liabilities. So we walked away from that particular transaction.”

“Mergers, acquisitions and succession planning are topics that I’m now dealing with almost daily for several reasons,” Mandarino revealed. “One reason is that right now our industry is in the toughest spot it’s been in for decades. We have numerous challenges locally, nationally and globally – including the decline of young people wanting to get into our industry’s labour force, which in turn means that the age of entry into printing is getting older. We definitely need to cultivate and encourage young people to get involved in the industry we all love. Another huge challenge, regardless of what the statistics say, is that people are ordering less printing. More and more is being done online and we’re all busy answering e-mails and being on the Internet. However, I do see a resurgence with the next generation, because at the end of the day, we’re all human and we want to touch and feel. Therefore, print will never go away – so more print providers are printing less quantities with enhancements and embellishments, to add value and attract more consumer and client interest.”

Changing industry factors

Mandarino also pointed out that, because a lot of print shop owners either took them over from their parents or their grandparents, they’re now looking at retirement and trying to find suitable candidates to take on management responsibilities. “There’s no question today that our industry is extremely labour intensive. Some owners may feel that it’s not an ideal quality of life for their children to take over their operations – even though there are some who’ve done incredibly well. However, because people are ordering less print, these shops need to grow and expand – and the best way right now to do that is through mergers and acquisitions. Organic growth today is very, very challenging, with the diminishing amount of print services and supplies people are buying.”

Someone in ‘the middle’

As I mentioned previously, as well as running 36 different companies, Mandarino does a lot of M&A work for others inside and outside of the printing industry. He’s also been recruited worldwide to elaborate on how to build print sales. So what’s his advice? Well, again, it’s complicated.

“I’ve found that when you’re buying another company or merging it with yours, it’s extremely difficult to accomplish what you want without someone in ‘the middle’. There are emotions and there are egos involved. There are over-evaluations and there are under-evaluations – so you need a levelheaded and objective person in between the buyer and the seller. I’m involved in 10-15 deals for other organizations each year, and one of the biggest challenges is trying to explain the cold, hard financial realities to both parties, so that you’ll eventually end up with a deal that’s a win-win for everyone. I’ve worked on several deals in Canada and the US, and to date have helped with over 60 successful mergers and acquisitions. Some have been for my own company, but most were for others. Obviously, non-disclosure agreements where information is kept confidential and not shared can be a huge issue. All the more reason to have that person in ‘the middle’ to examine both sides objectively.”

What to look for and strategies to consider

Over the years, Mandarino’s participation in M&As, helping other printers and industry organizations as that objective person in the middle, has taught him many things. He now facilitates about 15 deals each year working with other groups to achieve a win-win outcomes. “The reality today is that overall sales are dwindling. You must keep that in mind before you even begin,” he insisted. “Even many in-plants are downsizing. So there are two clear paths to growth – adding more clients, which is extremely difficult, or via mergers and acquisitions. If you’re considering the latter, there are questions that must be answered. For example, you must ‘lock-in’ your top salespeople and their clients. If key sales staffers decide to leave, will their clients follow them them? What previous agreements have been signed, if any? And how are sales in target markets divided? Does one person carry the load, or do several assume equal sales responsibilities. Or, are sales tied to an owner? What happens if he or she decides to leave or retire? One thing I’ve quickly learned is that if a company is selling to resellers, the situation should raise a red flag immediately.

Next, do any previous contracts exist with other companies that could impact overall sales in the future? What I find quite helpful is to carefully examine a random sampling of job dockets from the past five years – dockets that you choose – and determine if sales are trending up or decreasing. Never ask owners to provide these because in most cases they’ll simply pass along records of their most profitable projects. I’ve made that mistake before myself. Delve deeply into them and examine the hard costs. Are they accurate? I’ve gone through literally hundreds of project dockets and have discovered costing that’s, quite simply, incorrect. In fact, if you ask most shop owners what their true costs are, you’ll likely get a frown before you get any response – and most of the time, that’s usually a guess.

Another problematic area is current printing equipment. “Owners must plan for depreciation and the possibility of changing or upgrading machinery,” said Mandarino. “Traditionally, a press could be amortized over 20 years. But with new digital equipment being manufactured faster and faster with more automation, you’re lucky if you get 5 to 7 years. My suggestion is to look 6 to10 years down the road for litho equipment, 5 to 7 years down the road for digital technology, and 10 to 15-plus years for finishing equipment. Then, determine how much you’ll likely need to invest over that period of time” – remembering that today’s sophisticated offset and digital presses can involve millions of investment dollars. This will reveal a lot about a company’s strengths and weaknesses. Also, in some cases, new owners may actually earn less money for an initial period of time while the company gets fully operational, especially if his or her income is a percentage of sales. Part of this due diligence should also involve a careful examination of procedures and contracts with key suppliers. At the end of the day, both parties must realize that they’re buying or selling the three most crucial elements of a business – sales, people and equipment. Also, because industry today is so capital-intensive, you should build in a percentage of those costs into your pricing to replace aging equipment.

Key HR synergies and millennials

I cannot emphasize enough the importance of synergy, both at the management level and at the staff level. At CJ Graphics, we spend a huge amount of time, money and resources on making sure that all of our staffers are happy in their jobs and feel that they’re a key part of our operation. In fact, we hold regular corporate activities and events at all of the companies we’ve acquired to encourage teamwork and this feeling of inclusion. I recall helping out with a merger of two multi-million-dollar companies where all the financial aspects were agreed upon, but fostering a good corporate culture was somehow overlooked. The result was that a huge 35% of staff left the newly formed company!

Business owners must also understand what really motivates their staff – especially today’s millennials. For these younger people, quality of life and life balance is much more important that just the amount of their paycheques. They want to be part of something bigger, and feel that they’re key contributors. I actually produced a whitepaper on this subject and empowered one of our own millennials at CJ to help me with the research. We both worked with several students and teachers from George Brown College in Toronto, and talked to millennials in our own company as well. What I discovered was that some of these younger people felt compelled to move on to a new company after only one year. They felt the pressure of wanting to improve personally and professionally. When I asked why (and told them there was no pressure whatsoever from management to do this), many answered that they wanted to be more involved in the company and have more of an impact. It was a professional view of their current job status, as much as it was a personal lifestyle choice. Eventually, we formed special groups and social committees to get their feedback with a view to changing our corporate culture for the better. The bottom line is that today’s younger workers think quite differently than we did. You don’t have to agree with everything they say, but always listen intently to them and learn to embrace their opinions.”

NDA’s and your new best friend

This next area is one that’s also important for Mandarino – both as a business owner and as a mergers and acquisitions expert. It involves financing and that entity most of us love to hate – banks!

“You must involve – and trust – banks in any deal you facilitate,” he insists. “Aside from checking credit ratings, banks can give you a better perspective on the financial health of any company. Here’s a case in point. I recall helping with one merger where I couldn’t get a good idea about the liquidity of one of the parties because it had signed an NDA (Non-Disclosure Agreement) with its bank. After asking the bank several non-answered questions, I simply asked their rep if, in his opinion, he thought it was a good deal. He said “no” but wouldn’t elaborate any further because of the NDA. I later found out that the bank was “considering” putting this company into collections. But even that fact was misleading. As it turned out, the real problem was its accounts receivable. The shop simply wasn’t getting paid in a timely manner by its own customers. Sound familiar?

Timely accounts receivable

This leads me to my next point in assessing a company’s financial strength. Yes, a shop’s net income is very important – but so too is the timeliness of getting paid. I don’t need to tell you that many in our industry today don’t get paid for 60 and even 90 days. You simply can’t survive long-term doing that. There are even companies asking for 180 days! This is absolute madness, and we simply refuse to do business with these types of companies. Just say no. Or, even better, tell them that your bank will eventually discover those who take over 90 days to pay you – so it will set a bad pattern and may even harm their credit rating. With any new job, you should get 50% up front and 50% COD until a client establishes good credit with you. It’s completely irrelevant is they’ve got a good credit rating with other companies. So please trust me when I say that the much-maligned banker can be your best friend when it comes to navigating these precarious waters. Make sure he or she is involved from the beginning in any M&A so you don’t jump to any conclusions. You see just how complicated things can get as you try to do your best for both the seller and the buyer.

Finally, open your mind and listen to other people you trust. And never, ever be a micromanager. I know – I used to be one! You can’t be objective about your shop’s value or make any monumental decisions while you’re serving customers, paying bills, delivering product, negotiating with suppliers and buying equipment – probably all in the same day.”

In our July-August issue, Graphic Arts will delve into the advantages and pitfalls of another vitally important topic for our industry – succession planning.