Tough times can lead to great deals

By Stephen Bennie

In a previous article, we looked into what makes for a good acquisition. It certainly was not a delve into complex theories, rather it looked to firmly anchor in some common sense notions. The guidelines for assessing the merits of an acquisition were about suitability and scale. Was the acquired business complementary, would it integrate easily into the current business and add to the overall business. Was the scale of the acquisition appropriate both in terms of the size of the current business and in terms of a price that did not stress the balance sheet. The conclusion of that article was that large “transformational” acquisitions are dangerous, difficult to integrate, highly distracting for management and burdensome on the balance sheet, while sensible bolt-on acquisitions are much more attractive, being easier to integrate and requiring a whole lot less bank debt or new equity, if indeed any new capital is required at all.

The ideal acquisition, potentially only to be found in a world of magical realism, would then be one of a large and complementary “transformational” business that only cost as much as a bolt on acquisition. That of course only happens in an imagined world, that just shouldn’t happen in the real world. Owners just do not sell substantial businesses at a fraction of their intrinsic value. Well, they certainly never want to but sometimes circumstance dictates otherwise.

To make a point, let’s take an extreme example. IVE Group is an ASX listed company that prints, among other things, catalogues and glossy magazines. This used to be a great industry, but the arrival of PCs, tablets and smartphones have led to severe structural decline in that industry. And that decline has been rapid, just as recently as 2016 there were four large companies that competed with IVE Group. At that point in time, customers who needed printing services for catalogues and glossy magazines could use either IVE Group or Independent Print Media Group or Franklin Web or AIW or PMP. Jump forward to the beginning of 2020 and IVE have now acquired Franklin Web and AIW. Meanwhile Independent Print Media group had acquired PMP and changed its trading name to Ovato.  So now the industry had consolidated from five suppliers to two. The structural decline in the industry has already taken a very heavy toll but there was even worse coming around the bend, the arrival of the virus which impacted demand and logistics nightmares and through 2021 led to spiralling costs of doing business.