On the pitfalls of takeovers & mergers - Patrick Howard

The printing industry is shrinking, there’s no doubt about it. Without a clear-eyed acceptance of that central fact we are unable to make sensible decisions about planning for the future. Printing paper consumption in Australia declined 300,000 tonnes since its peak of 1.5 million tonnes in 2008, a fall of 20 percent. The drop appears to have eased last year, so let’s not run about crying that ‘the sky is falling’ but there is no prospect of a return to the levels of consumption pre-GFC.

There is no shortage of reasons for the decline in printing. Undoubtedly the internet and e-communication has a major role, but let’s not ignore the efforts of companies to reduce waste and target their marketing collateral at individuals. Most printing is to do with marketing and digital printing is all about printing less, not more. It bestows no dividend for longer runs; the final page costs as much as the first, no matter what the run length.

So what are appropriate strategies for an industry with little or no growth potential? How should printers conduct their business in an ever tightening market?

Few go-ahead business people are content with stability, with main-taining the same level of activity year in year out. Most see it, rightly, as a recipe for eventual failure. ‘Grow or die’ is an old saw that has a hard truth at its core. For many in the industry the path to growth is through gaining market share by any means, usually lower pricing to edge out a competitor. Of course the industry decries it and it’s always the other fellow’s fault, but printing lives in a perpetual price war, especially in this shrinking market.

Playing the fool’s game?

That kind of growth comes at a terrible cost, not only for the price cutter but for anyone else in the sector. It usually ends badly and we have no shortage of examples in recent times of printing companies going belly up even while their presses are still powering along. Price cutting as a strategy for growth is a fool’s game.

Another growth option is through merger and acquisition. Again, this is fraught with risk and only appeals to the risk takers. Due diligence on a target business is often carried out in a super-heated atmosphere, especially if there is more than one bidder and there are valuers, administrators and liquidators shuffling about. Even the most forensic examination of another company’s operation can not be foolproof.

There are many examples of printing companies that enjoyed a spectacular rise through M&As only to come crashing down when the true facts emerged. Bruce Peddlesden’s OnDemand in Melbourne is the most recent example but in recent times there was David Fuller’s Focus Press in Sydney and we’re still within memory of the GEON debacle.

Right-sizing a business

Yet, there is another way for business to grow and prosper even in the worst market. I direct your attention to the PMP Annual report in November where it was the pleasant task of Matthew Bickford-Smith as chairman to report what many of thought we’d never see again, a bottom line profit from the industry’s largest company. Once teetering on the brink of disaster, PMP is now talking about paying dividends to its long-suffering shareholders. Under the tutelage of Peter George, managing director, the company has focused on its core operations, sloughing its digital marketing arm, downsizing its workforce, consolidating its presses and premises and focusing on its core expertise of print and distribution.

There is nothing magical about such sound business practices; revenue was still down but so were costs. Money is being ‘incrementally’ invested across the business, while the goal is to have a debt free balance sheet by 2017.

PMP is not unaffected by industry over capacity with lower margins on its operations. Its operating revenue fell by 7.8 percent to $899.3m. Gordon & Gotch had a 5.3 percent volume decline.

But PMP still made money. It goes to show that looking after the business, extracting costs, concentrating on what you do best is still the best avenue to profitability. At the end of the day, good business is about making money as well as working usefully and contributing to the common weal.

Mind you, the board still expects significant rationalisation in the very competitive heatset market and is preparing itself. So, the dangerous waters of M&A have a fascination for even the best run businesses. We’ll have to wait and see.