The Current Pace Of M&A (CONT’D FROM PAGE 20)
that they don’t want to keep sitting on the sidelines. We think that these trends will converge at some point this year in a renewed surge of M&A activity. Sellers Still Want To Sell It’s important to remember that many firms have not been negatively impacted by COVID. In fact, many pack- aging, label, and niche commercial printers have seen their sales and profits grow in the past year. These COVID winners are busy, and they’re enjoying great valuations right now. Many of the COVID wounded were bolstered by forgiv- able loans from the Small Business Administration’s Pay- check Protection Program (PPP), which received a second round of funding in January. These firms are planning on returning to the market after the current qualification pe- riod ends. Meanwhile, the availability of cheap and plentiful mon- ey for financing acquisitions is supporting solid multiples
that prospects for growth are good. Using both borrowed money and private capital, they seek out solidly perform- ing acquisition targets they believe they can make even more profitable; or that they can add to a platform of sim- ilar companies previously acquired. The highflyers in this group are the private equity (PE) firms: boutique investors with access to capital from high-net-worth individuals and other well-funded sources. Since COVID, we have been seeing some hesitancy on the part of strategic buyers, who are concentrating on getting their own houses in order as they try to determine what the recovery will look like and how the lending en- vironment might change. But many of these buyers have excess capacity to fill, and they know that they can’t post- pone acquiring new accounts indefinitely. The financial buyers, meanwhile, have a lot of money
— some of the best we’ve in the last 10 years. Proposed increases in capital gain rates are driving many sellers to close their deals before year-end. As strategic buyers who were reluc- tant to perform due diligence during COVID get back into action, we foresee a return to robust activity. Another positive sign is the flexibility that some buyers are showing in the way they structure deals with COVID-impacted sellers. In cases where the seller has recovered quick- ly, the buyer may be willing to remove the two or three months of poor results and plug in the same number of months from the pre-COVID year, so that there’s no penalty to the calcu- lation of selling price. (We call this EBITDAC: Earnings Before Interest, Taxation, Deprecia- tion, Amortization, and Coronavirus.) In the same spirit of accommodation, some buyers will acquire on the basis of 2020 num- bers and then wait to see if performance in 2021 rebounds to what it was in 2019. If this happens, the seller gets an earnout — in effect, a second paycheck — to make up the differ- ence between the initial selling price and the adjusted one. Hope In Distress We wish we could say that every printing business is looking at good options like these, but the sad fact is that for some of them, the damage done by the pandemic has been too severe. These firms have been staying open mostly by virtue of their PPP loans. Once that resource is exhausted, however, they will have some tough choices to make. Liquidating press equipment and other as- sets probably won’t be advisable, given that liquidation values currently are low. We think CONTINUED ON PAGE 24
22
www.boardconvertingnews.com
April 12, 2021
Made with FlippingBook HTML5