Seven tests for private equity – Print21 magazine feature

As the industry focuses on the result of the Blue Star bondholders vote, James Cryer sharpens his pencil and tallies up the scorecard for private equity’s involvement in the printing industry.

Private equity has been grabbing industry headlines recently for all the wrong reasons. Once touted as encour­aging survival of the fittest, their modus operandi was to divest extraneous assets, re-invigorate the business, inject new capital and know-how, and flog it off at a huge multiple of the purchase price, typically within five years.

But recent collapses of well-regarded retail brands, such as Borders and Colorado, have reminded us that the embrace of the PE monster can be the kiss of life—or death. So, with the fifth anniversary of their arrival in the printing industry coming up, how do the PE gurus rate on the scorecard?

First test: did they buy poorly performing assets in need of a re-vamp and thorough overhaul?

No, amazingly they chose the pick of the bunch among printing companies, the vigorous, the strong and the healthy, immediately setting an impossible bar against which to extract improvements.

Second test: did they buy cheap?

Remember this was an era of easy credit that fuelled a feeding-frenzy. The largest single PE purchase, Promentum (aka Penfold-Buscombe, bought for $127 million), was bought at the top of the market, again making it virtually impossible to extract any upside.

Third test: did they destroy brand value?

The golden rule of any takeover is to build, not dismantle, any goodwill embedded in the brand. So, did they preserve the intrinsic value in famous names such as Dynamic Press, AP Mail, Graphic World, Agency Printing, McMillans, et al? Not really.

Fourth test: did they become role models in showing the rest of the industry how to be good corporate citizens?

Back in 2007, Gresham PE said: “… as a brand GEON is strategic, visionary and progressive in scope and will… move forward with a unique offering.” I may be wrong but I see a narrower offering from GEON than from a lot in the industry.

Fifth test: did they show the rest of the industry how to manage for improved results and deliver improved sector profitability?

Both Blue Star and GEON are groaning under massive debt burdens, only recently alleviated by their long-suffering rich uncles.

Sixth test: did they become good corporate citizens by being part of the industry?

Where are the scholarships? Where are the apprenticeship training programs? Where are the leadership roles and participation in industry associations? As a serial event attendee, I don’t see much evidence of their involvement.

Seventh test: did they develop a good exit strategy?

As everyone in the industry knows, there is an inherent tension within the PE model. It seems almost inconceivable that CHAMP or Gresham will see any sudden or dramatic upturn in profitability, given the intense competition they find themselves encountering. Treading water may be a more apposite term, aided only in their survival by the generous tax concessions they enjoy on their interest costs.

Another PE fund, Helmsman, has already exited after a very unrewarding relationship with Chippendales, licking its wounds, and probably with a sigh of relief.

Optimal print size

How has it come to this? There are probably many lessons we can learn, but one recurring thought springs to mind. I suspect there is an optimal size for a printing company, and it’s a lot less than the bean counters would like. It may range from 40-80 people, reflecting the fact that the printing process is highly dependent upon a lot of mutual, and often quite personal, interactions between individuals, all acting within a highly-integrated environment.

Often the financial engineers who drive these mergers/acquisitions don’t see or at least don’t put any value on this need for team-mindedness. It’s old-fashioned, irrational, and can’t be measured. But we’ve all seen the alienation, the loss of team spirit, and the loss of belonging that arises within those organisations of accountant-lead amalgamations.

So there’s my version of the PE Report Card. Make of it what you will. The one enduring mystery is this: if the printing industry is such a primitive backwater capable of a quick-fix and an easy buck, why haven’t there been more takers—especially recently, when the asking price is a lot lower than five years ago? If you were in the industry long-term, wouldn’t you want to buy a few more bargains to offset your poor judgement earlier on?