Rock LaManna, Contributing Editor05.31.13
For regional label and narrow web companies, one of the strategies used only by larger businesses – the merger and acquisition – has suddenly become a realistic option for growth. I’d like to enlighten you on why high-level financial trends are making this possible, and what you can do to take advantage of it.
At the AWA Merger and Acquisitions Executive Forum in March, I saw firsthand why big players are pining for small to mid-sized companies to consider the merger and acquisition.
First, you need to consider the success rate of the industry as a whole. Label and narrow web is part of a market that’s proven remarkably resilient to economic downturns.
While commercial printers are struggling – with sales either flat or 1-2% – the label industry is solid. AWA projects overall market growth in the label market to be 4% globally, with 6% growth in emerging markets. Growth rates could be higher in niche markets, such as heat shrink sleeve labels and in-mold labels.
The takeaway is that label and narrow web companies have generated reliable ROI over the years – that’s attractive. But why do I emphasize the market opportunities for small to medium sized businesses?
That can be attributed to the vast industry fragmentation. According to AWA, there are 15,000 label converters worldwide, with approximately 3,500 in North America. Probably 80% more of those companies are under $1 million in sales.
This fragmentation has rattled the cages of big investment banks and private equity firms. These investors realize they can no longer find acquisitions beyond the $100 million range, where they usually tend to graze. The result is an interesting dynamic, a kind of collaboration between Wall Street and Main Street that could yield some terrific opportunities for both parties, if everyone can learn to speak the same language and play ball.
That, my friends, is a big if. I’ll get to the details of that shortly, but first, let’s do a quick review of a growth strategy seldom considered by small to mid-sized companies: The merger and acquisition.
No Longer the Tools of the Big Dogs
In the past, the M&A was considered the tool used only by big companies with ample resources and an appetite for aggressive growth. In truth, we tend to see all types of players pursuing M&As. Here are three main players:
The titans. These include large corporations that are poised to make strategic acquisitions to achieve their long-term vision. With deep pockets, these players will only move on innovative companies that help them with their long-term goals. Every move they make is very strategic and research driven.
The small and mid-sized businesses looking to grow. These companies have experienced solid growth and are now looking to take the next step. They’re looking to boost their ROI by acquiring a company and quickly accelerating their growth.
The private equity group. These smart, very sophisticated investors are extremely focused on the bottom line. They’re looking to make acquisitions that will yield the highest return. Not necessarily industry experts, they are very good at understanding the financials that will benefit them in windows of five to ten years.
Let’s focus on #2 – the small and mid-sized business looking to grow. Many label and narrow web companies under $10 million dollars fall into this category, but the majority don’t understand how and why an M&A is used.
An M&A is not a financial transaction reserved solely for those looking to retire. Quite the opposite, actually. It’s a tool that can help you:
Access new clients. If you’re looking to quickly gain access to a broader book of business, merging or acquiring another client can open new doors for your team.
Access new territories. Geography is a huge impediment for growth for anyone in the converting industry. Nearly 96% of the transactions take place locally, so the only way to expand your reach is to join forces.
Access new technologies. Is your capital restricting you from making the equipment acquisitions you need to grow your business? Perhaps you can find a complementary partner with the tools you need, or be acquired by a bigger fish to expand your resources.
Access new talent. Perhaps one of the most critical tools is expanding your talent pool. Qualified, industry-specific personnel are difficult to find. An M&A allows you to add to the infrastructure and take on added capacity for growth.
Now that you understand the players and opportunities associated with an M&A, let’s delve into why it’s becoming an attractive option for both Wall Street and label and narrow web companies on Main Street – as well as what’s preventing the party from getting started.
Can Wall Street Work with Main Street?
As I mentioned earlier, the amount of activity on the M&A front has quieted from years past. Consolidation among the large players has led to fewer and fewer deals. Buyers are looking for smaller deals that feature double-digit growth rates – which can be in the converting industry.
Yet the deals aren’t clicking. Why? Here are my top reasons:
Fragmentation. As I mentioned earlier, fragmentation has made it more difficult to find profitable businesses. Again, AWA notes there are 3,500 label converters in North America alone, with 80% of them under a million in sales.
Different goals. When I talk about M&As, I often allude to a win-win situation. Unfortunately, in the case of a larger investment company looking to buy a smaller label and narrow web company, the win-win scenario can easily become an I-win and you-lose situation.
The investor just focuses on his bottom line, while the owner just wants to keep his business going and his people happy. Both sides need to agree on a common goal, and build toward it.
Mistrust. A synergistic partnership, or a win-win situation, helps reduce the amount of mistrust that takes places in these situations. Perhaps part of it is a cultural bias. The small business owners resent the flashy investment banker. It’s the classic Wall Street versus Main Street clash.
Lack of financial sophistication. Investors live by the numbers. Their entire day is spent mulling over them. A small to mid-size business owner may be sound financially, but his or her time is spread thin over all aspects of the operation. Creating sound financial metrics, including a cash-flow analysis, is the first step toward speaking the language of investors.
Lack of transition team. Unfortunately in M&As, all eyes are focused on the sale, instead of what will occur after the sale. Today’s investors are beginning to see the true value of understanding the management structure behind a business, and are reluctant to take a shot at anything that’s on shaky ground.
A top priority is thus retaining talent in place to help ensure the transition is a smooth one, and that a team is ready to keep the
company strong and profitable.
Are Small to Mid-Size Label Companies Considering M&As?
At this point, many companies aren’t aware of the marketplace shift toward their companies. That’s natural, considering an M&A isn’t even on their radar. But many owners don’t realize the precarious situation of many investment banks and private equity firms.
Following the recession of 2008, many banks have been holding on to cash, and are soon approaching the time when it will lose its designation as “capital.” Likewise, private equity groups are feeling pressure too, as their portfolios have investments that required a sale within five years.
The financial explanation behind these trends is worthy of another article, but suffice to say the pressure is on these players to start moving on profitable investments.
Does that mean they’re desperate to take action? No. These are financial experts, and they’ll move on investments that make sense. For small to mid-size companies, they tend to only choose highly-profitable, niche-oriented operations.
So why does this apply to anyone in the label and narrow web industry – even companies with no urgency to sell or merge?
The point is that market forces are moving in such a way that some tremendous opportunities may soon materialize for small to mid-size businesses, and they’ll require that you’re prepared to interface effectively with a larger company or financial institution.
By “interface,” I mean you’ll need to show them the value of your business. That requires proving to them, from a strategic, operational and financial standpoint, that you’re worth what you say. And here’s why you should prepare yourself, M&A or otherwise, to do that with your business.
Get Your House In Order
To explain what I mean by “Get your house in order,” I’m going to use an analogy, which involves, naturally, cleaning your house. The only way to really clean your house is to pretend that you’re going to move.
When you move, you throw away all the junk, and focus on what’s really valuable.
In the same way, when you’re setting yourself up to sell, you have to get all your financials in order. You need to prove where you’re profitable, and showcase the quality elements of your operation and overall long-term strategy.
When you do that, you see the good and the bad. You discover where you need to shore up the operation, and where you’re really profitable. You get your house in order, a move that can only help your business – whether you’re selling it or not selling it.
It’s up to you whether or not you want to move on the news that regional label and narrow web companies will be more valuable to big investors. The point is that you should always be at the ready when opportunity knocks. Your enterprise can only benefit from getting your house in order.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at rock@rocklamanna.com.
At the AWA Merger and Acquisitions Executive Forum in March, I saw firsthand why big players are pining for small to mid-sized companies to consider the merger and acquisition.
First, you need to consider the success rate of the industry as a whole. Label and narrow web is part of a market that’s proven remarkably resilient to economic downturns.
While commercial printers are struggling – with sales either flat or 1-2% – the label industry is solid. AWA projects overall market growth in the label market to be 4% globally, with 6% growth in emerging markets. Growth rates could be higher in niche markets, such as heat shrink sleeve labels and in-mold labels.
The takeaway is that label and narrow web companies have generated reliable ROI over the years – that’s attractive. But why do I emphasize the market opportunities for small to medium sized businesses?
That can be attributed to the vast industry fragmentation. According to AWA, there are 15,000 label converters worldwide, with approximately 3,500 in North America. Probably 80% more of those companies are under $1 million in sales.
This fragmentation has rattled the cages of big investment banks and private equity firms. These investors realize they can no longer find acquisitions beyond the $100 million range, where they usually tend to graze. The result is an interesting dynamic, a kind of collaboration between Wall Street and Main Street that could yield some terrific opportunities for both parties, if everyone can learn to speak the same language and play ball.
That, my friends, is a big if. I’ll get to the details of that shortly, but first, let’s do a quick review of a growth strategy seldom considered by small to mid-sized companies: The merger and acquisition.
No Longer the Tools of the Big Dogs
In the past, the M&A was considered the tool used only by big companies with ample resources and an appetite for aggressive growth. In truth, we tend to see all types of players pursuing M&As. Here are three main players:
The titans. These include large corporations that are poised to make strategic acquisitions to achieve their long-term vision. With deep pockets, these players will only move on innovative companies that help them with their long-term goals. Every move they make is very strategic and research driven.
The small and mid-sized businesses looking to grow. These companies have experienced solid growth and are now looking to take the next step. They’re looking to boost their ROI by acquiring a company and quickly accelerating their growth.
The private equity group. These smart, very sophisticated investors are extremely focused on the bottom line. They’re looking to make acquisitions that will yield the highest return. Not necessarily industry experts, they are very good at understanding the financials that will benefit them in windows of five to ten years.
Let’s focus on #2 – the small and mid-sized business looking to grow. Many label and narrow web companies under $10 million dollars fall into this category, but the majority don’t understand how and why an M&A is used.
An M&A is not a financial transaction reserved solely for those looking to retire. Quite the opposite, actually. It’s a tool that can help you:
Access new clients. If you’re looking to quickly gain access to a broader book of business, merging or acquiring another client can open new doors for your team.
Access new territories. Geography is a huge impediment for growth for anyone in the converting industry. Nearly 96% of the transactions take place locally, so the only way to expand your reach is to join forces.
Access new technologies. Is your capital restricting you from making the equipment acquisitions you need to grow your business? Perhaps you can find a complementary partner with the tools you need, or be acquired by a bigger fish to expand your resources.
Access new talent. Perhaps one of the most critical tools is expanding your talent pool. Qualified, industry-specific personnel are difficult to find. An M&A allows you to add to the infrastructure and take on added capacity for growth.
Now that you understand the players and opportunities associated with an M&A, let’s delve into why it’s becoming an attractive option for both Wall Street and label and narrow web companies on Main Street – as well as what’s preventing the party from getting started.
Can Wall Street Work with Main Street?
As I mentioned earlier, the amount of activity on the M&A front has quieted from years past. Consolidation among the large players has led to fewer and fewer deals. Buyers are looking for smaller deals that feature double-digit growth rates – which can be in the converting industry.
Yet the deals aren’t clicking. Why? Here are my top reasons:
Fragmentation. As I mentioned earlier, fragmentation has made it more difficult to find profitable businesses. Again, AWA notes there are 3,500 label converters in North America alone, with 80% of them under a million in sales.
Different goals. When I talk about M&As, I often allude to a win-win situation. Unfortunately, in the case of a larger investment company looking to buy a smaller label and narrow web company, the win-win scenario can easily become an I-win and you-lose situation.
The investor just focuses on his bottom line, while the owner just wants to keep his business going and his people happy. Both sides need to agree on a common goal, and build toward it.
Mistrust. A synergistic partnership, or a win-win situation, helps reduce the amount of mistrust that takes places in these situations. Perhaps part of it is a cultural bias. The small business owners resent the flashy investment banker. It’s the classic Wall Street versus Main Street clash.
Lack of financial sophistication. Investors live by the numbers. Their entire day is spent mulling over them. A small to mid-size business owner may be sound financially, but his or her time is spread thin over all aspects of the operation. Creating sound financial metrics, including a cash-flow analysis, is the first step toward speaking the language of investors.
Lack of transition team. Unfortunately in M&As, all eyes are focused on the sale, instead of what will occur after the sale. Today’s investors are beginning to see the true value of understanding the management structure behind a business, and are reluctant to take a shot at anything that’s on shaky ground.
A top priority is thus retaining talent in place to help ensure the transition is a smooth one, and that a team is ready to keep the
company strong and profitable.
Are Small to Mid-Size Label Companies Considering M&As?
At this point, many companies aren’t aware of the marketplace shift toward their companies. That’s natural, considering an M&A isn’t even on their radar. But many owners don’t realize the precarious situation of many investment banks and private equity firms.
Following the recession of 2008, many banks have been holding on to cash, and are soon approaching the time when it will lose its designation as “capital.” Likewise, private equity groups are feeling pressure too, as their portfolios have investments that required a sale within five years.
The financial explanation behind these trends is worthy of another article, but suffice to say the pressure is on these players to start moving on profitable investments.
Does that mean they’re desperate to take action? No. These are financial experts, and they’ll move on investments that make sense. For small to mid-size companies, they tend to only choose highly-profitable, niche-oriented operations.
So why does this apply to anyone in the label and narrow web industry – even companies with no urgency to sell or merge?
The point is that market forces are moving in such a way that some tremendous opportunities may soon materialize for small to mid-size businesses, and they’ll require that you’re prepared to interface effectively with a larger company or financial institution.
By “interface,” I mean you’ll need to show them the value of your business. That requires proving to them, from a strategic, operational and financial standpoint, that you’re worth what you say. And here’s why you should prepare yourself, M&A or otherwise, to do that with your business.
Get Your House In Order
To explain what I mean by “Get your house in order,” I’m going to use an analogy, which involves, naturally, cleaning your house. The only way to really clean your house is to pretend that you’re going to move.
When you move, you throw away all the junk, and focus on what’s really valuable.
In the same way, when you’re setting yourself up to sell, you have to get all your financials in order. You need to prove where you’re profitable, and showcase the quality elements of your operation and overall long-term strategy.
When you do that, you see the good and the bad. You discover where you need to shore up the operation, and where you’re really profitable. You get your house in order, a move that can only help your business – whether you’re selling it or not selling it.
It’s up to you whether or not you want to move on the news that regional label and narrow web companies will be more valuable to big investors. The point is that you should always be at the ready when opportunity knocks. Your enterprise can only benefit from getting your house in order.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at rock@rocklamanna.com.