Top markets for M&A

Mergers & acquisitions are the ultimate barometer for every industry. They can tell you what the market thinks is important, what your competitors are thinking, and who believes the business is valuable long-term. And certainly, if you are looking to do a buy-sell play, you can use current activity to gauge potential interest and likely valuations. Most important, however; M&A can signal the necessity for your company to change. Be it product offerings, vertical presence, core capabilities, in-demand ancillary services, or any factor, M&A activity can help you prepare a directional plan for the road ahead.

Whether you are considering a transaction in 2012 or simply looking to extend your competitive advantage, you need to stay abreast of the deals — big and small. And you need to understand their influence in your given market. Are you losing or gaining competition because of M&A’s shift in players? Are companies entering or exiting your venue? Is what you are doing today valuable for the long-term?

Acquisitional buyers within today’s label industry are primarily the major strategic enterprises and private equity firms. The former includes huge conglomerates — both domestic and global — that seemingly dominate every headline. The private equity firms span numerous investor types and include mid-market portfolio holding companies growing steadily into major status. Both of these buyers know their stuff. Experienced M&A directors (along with their M&A firms) are spearheading the plays. Each and every transaction is scrutinized rigorously for its 24-, 36-, and 60-month value, and no opportunity is pursued that does not provide for a positive upside. They know what they are doing. And what they think matters.

So, in today’s environment, what are they thinking?

Major enterprise: interest and opportunity

Strategic players continue to hunger for and gobble up small- to mid-sized label enterprises. Pressured by shareholders, they are pretty much required to deliver accretive earnings regardless of economic situation or market fluctuations.

Just like in any industry, major-player acquisitions are moves to increase operational scale, while also altering the fragmented market for business advantage. In essence, majors are moving to consolidate services into single platforms and outweigh alternatives, by sheer size and scope.

They are seeking to expand customer bases, geographies, products, services, and new possibilities. Additional capacity at reasonable cost provides them with improved channels to key markets and financial synergies that increase value.

In labels, the strategic majors are currently most active in prime and data labels, as these are two areas that can be easily integrated into their present lineup. They have existing businesses within their organizations and are bolstering their capabilities. For them, quick mobilization and synergy realization are key. They can make acquisitions in prime and data labels and see revenue and profitability gains in a matter of months. Their platform is already in place. Strategic majors can often be restrained by their leverage and credit lines, so they typically buy at their comfort level.

These players are not looking for a two-year timeline or a transaction that carries too much risk. Familiar products and services are favored. Yet, the additional assets and customer bases should be complementary to the core and have limited unnecessary overlap. 

In addition to the product type, strategic buyers are currently looking for candidates that can complement their operations with positions in healthcare, pharmaceuticals, and food and beverage, and avoiding enterprises with heavy account concentration or little diversification. Acquisition candidates have a little more slack with regard to equipment and leadership, because the major company is already well positioned in those areas and many times simply folds an acquisition into current operations.

These transactions are typically better publicized, and deal value is readily accessible for the public companies. Multiples vary based on many factors, and deal structure can be substantially different. Because of this, any company selling needs to understand these variances and have reliable consultative and advisory resources. If you need help deciphering what these mean, I’m happy to assist.

Private equity: interest and opportunity

Private equity, too, is very active in the label space. In fact, over the past 10 years, I would estimate that around 70 percent of all significant label deals had private equity leadership or backing. Yet, you may hear of fewer due to restrictions in information release and investor confidentiality, along with the fact that deal values are not readily publicized. Additionally, there is seemingly more confusion over what private equity buyers actually are and a misperception of their being similar to venture capitalists.

Having executed multiple deals for private equity clients, I can attest that they are very knowledgeable and diligent enterprises whose ultimate goal can easily align with strong enterprises. Just like you, they are seeking hard work, growth, and success. They share in the building, the strategy, and the risk. And they provide the vital support — strategic, operational, financial, etc. — to drive strong results. With private equity plays, entrepreneurs are often still at the helm of their enterprises, championing their people and resources.

Private equity acquisitions are unlike strategic acquisitions in many ways. The most important is that private equity buyers are typically developing new platforms or creating what they believe could be game-changers in the industry.

They build investment models by examining opportunities that hold certain attributes: industries with growth rates above GDP, areas that perform well in differing economic cycles, and those that can produce rapid buildout and value acceleration because of increasing size and position. They are looking at specific investment cycles — put in their time and resources and get out upon reaching specific milestones. Timelines can be 18 months, two years, five years… depending on the particular elements of their investment model.

Private equity firms prefer investments that have limited capital need, proven management teams, strong barriers to customer exit and entrance for competition, and contractual business relationships. They dislike risk as much as any other acquirer, but they may be more apt to take on innovative operations or up-and-comers, provided such companies can truly provide a compelling upside.

In our industry, private equity has significant interest in prime labels, due to their performance in the current economy and strong financial returns of prior M&A plays. Significant recent deals include Resource Label Group’s (portfolio company of First Atlantic Capital) acquisition of Pamco and KRG Capital’s purchase of Ft. Dearborn Company.

Thus, at the moment, you can find numerous private equity firms as owners, and even more of them seeking opportunities to get in. Enterprises are also selling from mid-market private equity owners to larger private equity firms. These firms in turn are pulling together substantial rollups that will likely have a huge impact on the trajectory of labels in the next few years.

Private equity firms are not as interested in data labels, as they believe companies in this market do not have the guaranteed revenues or customer lock. While data label entities may indeed bring strong performance or good books of business, their higher competition and weaker customer ties can result in lower ultimate sell multiples — not a good thing in the private equity world.

If you are looking to buy, consider where these top investors are looking and think through what you need to be to compete. If you are looking to sell, examine your position in the prime areas of opportunity. Do you offer what today’s buyers are looking for? If you need to change course, what will it take to get there and how long will you need? Make sure you accommodate this time lapse into your transformation strategy, as you don’t want to end up in 2014 with a company that would have been competitive in 2012.

Yet, market dynamics are constantly in flux. If there is one thing we have learned in the past several years it is that what is in demand today can burn out by tomorrow. The above activity is my best view for what’s likely to transpire over the next six months. But things can change quickly. New systems, technologies, inventions, and business opportunities are part of our culture. That said, your key to a lucrative deal is knowledge. Stay apprized, stay informed, and stay tuned. Your M&A opportunity could be right around the corner.

This article was published in L&L issue 2, 2012