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Let's Make A Deal

By: Rebecca Trela - Date: 01/26/2009

Publicly traded firms—Private companies tend to trade at a discount to public firms, partially because they have less access to capital. However, public firms are a good guide to where the industry is and are the most compelling valuation, according to Craig Farlie, an investment banker.

Recent transactions—The value of other recent deals, both public and private, lends insight into what price the market will bear at a given time.

Discounted cash flow analysis—This metric attempts to convert future cash flows into today's dollars.

Leveraged buyout analysis—This determines what a potential buyer could pay in a situation where a majority of the purchase price is borrowed. It is based on a theory that the company's value equals the amount a buyer would pay to acquire control of it.

Source: Craig Farlie, Farlie Turner & Co., and Msquared Capital Partners Inc.

Is your company shopping for a buyer this year?
Good luck finding one. In a financial climate where credit is both scarce and expensive, buying, selling or merging a company is a difficult feat. Private equity companies have been skittish about print firms, says Craig Farlie, an investment banker with Farlie Turner & Co., headquartered in Ft. Lauderdale, Fla.

"For a lot of people in the private equity community, when you mention 'print,' they run. They think of print as very capital-intensive and there have been some memorable, spectacular blowups that have scared people off," Farlie says, referencing Quebecor's stunning fall from No. 2 commercial printer to Chapter 11 earlier this year.

There is a wealth of capital wide open to firms that have expanded beyond a narrow definition of "print," however. When Farlie began working on the sale of commercial printer Las Vegas Color Graphics last year, he was surprised by the "tremendously strong private equity interest."

"A lot of the reason for that interest was because our client offered a total print, fulfillment and distribution solution," he says. "When you originate some of the creative work, or do mailing and fulfillment, you make yourself more 'sticky' to end users. It attracts buyers that might not otherwise be interested, and it makes your company more valuable." The printer was acquired by Chicago-based private equity firm the Decatur Group and the publicly traded firm Aries Capital Equity.

Looking at a list of about 60 mergers/acquisition transactions done in the past year, about 50 of them were completed before September, Farlie says. "Since they're private, it's not always easy to see how they're done, but it's fair to say that overall, multiples are down." Company prices are like gas prices, Farlie says—quick to shoot up but more sticky coming down, as owners are reluctant to adjust their expectations downward.

Speculation about falling values has stopped several deals this year and highlighted some pending paperwork. In August, mega-distributor WorkflowOne announced that its parent company, WF Capital Holding Inc., agreed to be acquired by Enterprise Acquisition Corp., a "special purpose acquisition company." Enterprise agreed to the aggregate purchase price of $669 million, which includes the assumption of $490 million of debt.

In an August press release, Enterprise stated, "To the extent that the indebtedness of Workflow is less or greater than $490 million at the closing of the merger, the common stock portion of the purchase price will be adjusted accordingly." At the time, says mergers and acquisitions consultant Jim Anderson, the company's price was about 8.5 times its EBITDA value. (See sidebar)

EBITDA is an acronym meaning "Earnings Before Interest, Taxes, Depreciation and Amortization." It's a metric used to show a company's profitability, and it became popular in the '80s to show the potential profitability of leveraged buyouts. Sometimes, it is used to disclose more favorable numbers to investors without highlighting cash flow. 

EBITDA = Operating Revenue - Operating Expenses + Other Revenue
The company's value, Anderson says, was partially based on competitors' valuations. (See "How to Value a Company," page 38.) Workflow is not a publicly traded company, but could become one if the deal with Enterprise is finalized. Since August, competitor firm InnerWorkings' trading value has fallen from 19 or 20 times EBITDA to 8.7 times.

"In general, print industry multiples have fallen 25 to 50 percent," Farlie says. That could cast a shadow on Workflow's deal, Anderson expects. Calls to Workflow, Enterprise and investment firm Perseus Capital, a Workflow majority shareholder, were not returned.

Although the days of loose capital are over, some deals are still going on, thanks to creative solutions like earn-outs and other seller-financed techniques. That's good news for print distributors, who mostly finance deals on an earn-out basis even in good times. It's a common agreement for businesses without tangible assets but a lot of goodwill. The buyer and seller agree to a price, of which a portion is paid at the deal's close. Over a period of time, generally three to five years, the seller remains at work in the business and earns the remainder of the business price based on its profitability.

"This is really an opportune time for acquisitions, for people to grow marketshare at bargain prices," Farlie says. In the coming year, due diligence may become more stringent, and deals may take longer to close. Fewer banks will lend, and the ones that do will ask more questions. "But I certainly believe that there's a reason for optimism going forward," he says.

Rebecca Trela is managing editor of Print Solutions magazine. Email comments to rtrela@psda.org.

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