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Private Equity and printing: the MAN Roland perspective

Thursday, 02 August 2007
By Print 21 Online Article

The business models employed by private equity investors are designed
for investing in industrial sectors and companies in which annual returns of
20 per cent and more, calculated on the amount of the equity capital, can
be achieved. To make these kinds of returns possible, companies have to
highlight hidden values.

From the point of view of private equity investors,
such values seem to be the present in the printing industry.

Essentially, hidden values like these are found either in assets such as
property holdings, or in equity investments in associated companies. There
is also potential to be found by generating the same operating results with
a more efficient organization through cost reductions. In addition, companies
can also enhance the potential for growth, for example, through acquisitions
that would have been very difficult with the former shareholders.

However, the printing industry is apparently satisfying the demands of investors. Characterised by over-capacities, highly fragmented sub-market
segments and the pressure to consolidate operations, the printing industry
is proving quite attractive to private equity financing structures. The companies involved can pat themselves on the back. Without a doubt, our industry is viewed from the outside much more positively than we insiders
could have imagined following the recent past.

Even though private equity investors’ expectations regarding returns tend
to be similar, the investment structures themselves are flexible. Some investors want a 100 per cent takeover of the target company, while others
are interested only in acquiring a 50 per cent share of the company.

Investment models regularly give management the opportunity to acquire a
stake in the company.
The advantage for both parties is obvious: it is
through this type of structure that motivated management staff receive a
benefit from a company’s positive development. In turn, investors secure
the right team for making the corporate and investment objectives reality.

A typical characteristic of private equity investments is the limited duration of
three to seven years in which the investors wish to be involved with the
company. At the end of that time, they generally wish to sell their stock at a
profit. This medium-term exit strategy increases the pressure on those responsible for managing the investment to get the company up and running
as it should, and as quickly as possible.

One frequently criticised feature of private equity investments is the re-capitalization of the investors via credits and dividend payouts, which can result in quite a financial burden to the associated companies. However, just few private equity investors make excessive use of this practice, despite the few spectacular cases of the past that, given the recurring coverage by the press, would lead one to believe otherwise.

Corporate financing today is a challenging undertaking, given the ever-increasing demands for corporate transparency vis-à-vis creditors. For many companies, the classical means of financing, i.e. through their main bank, is difficult.

Here, financing through private equity firms can be a useful alternative that enables a company to survive, or to finance expansions. Though the funds are provided only for a limited time, the amounts are generally sufficient. Furthermore, investment in or even the complete sale of the company to private equity investors can pave the way to an orderly and mutually beneficial succession plan.

Last but not least, private equity investment models can give a company fresh development impetus, including management buy-outs and buy-ins, that would otherwise not be possible with the company’s original ownership structure.

The engagement of private equity investors can help bring about or accelerate change within the printing industry. Their legitimate desire for healthy
returns can, over the medium term, act as a catalyst for improved efficiency,
overall improvements in profit margins, and higher rates of return.

This should give all of the players in the market food for thought, and might
even provide the trigger needed to apply the investors’ strategies within a
company, but independent of them. Also, the activities of private equity investors
sharpen the competition among the various financing instruments
and those who offer them.

So many printing companies can, for the first
time, take advantage of a true alternative to financing through their main
bank. The increased interest of private equity investors in the printing industry
is therefore absolutely desirable.

From our own experience we can say that interaction is often significantly
more matter-of-fact and target-oriented than is commonly believed, and
sometimes even better than traditional ownership structures.
Working together
is founded exclusively on a commonly agreed strategy and concerted
business planning.

The style is unemotional, business-like and thus
equitable. What stands out compared to earlier conglomerate structures is
that the undivided focus of the investors on the success of their venture.

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