The merger and acquisition proposition is an easy one for the office technology set. It’s not a question of it, but a question of when dealers will make a move.
As we close out this month’s look at M&A, we asked our dealer panel—which represents some of the heaviest hitters in the office dealer transactional set—which variables will help set the tone and volume of activity in the second half of 2021 and heading into the next, (hopefully) pandemic-free year.
Certain hurdles can play a role in how quickly a deal can get done, particularly those that involve real estate. Patrick Flesch, president of Gordon Flesch Company, notes that sellers who want to include their buildings to the asset purchase agreement can make negotiations dicey and complicated. Coming to grips with inheriting properties switches the onus to buyers, who need to decide whether the geographical book of business and opportunities are worth taking on the physical property.
From a COVID adaptability standpoint, Flesch notes a prospect’s ability to sell virtually, remain close to clients and continue writing business will factor into the attractiveness of that company as it seeks to make a deal post-pandemic.
“If the dealerships that were able to weather the storm bounce back with a really strong second half of the calendar year leading into 2022 are looking to exit the business, they should be able to do so for quite a profit,” he said. “So many people are just exhausted from weathering this pandemic storm. I’d say it will accelerate a lot of those (owners) who stayed in the business two to five years longer (than intended), and are just ready to get out. We could see that activity pick up in the fall and maybe as early as this summer.”
John Lowery, president of Applied Imaging, notes the continued movement of OEMs flipping direct branches to their top dealer resellers is shaking up the landscape, and the availability to economically borrow funds will continue to prime the activity pump. Lowery orchestrated his company to be well-positioned to take advantage of deals that make strategic sense, and he currently has about a half-dozen prospects in various stages of negotiations.
“Only limitation right now is my admin department asking me to give them some breathing room to catch up with what we’ve done,” he said. “With some of these deals, I’ve been talking with people for four or five years. Right now, I’m more interested in developing relationships with deals. At some point down the road, when they’re ready to make a move, they’ll think of us.”
Sellers are in the process of ascertaining what is in their best interests, according to Jim Sheffield, CEO of UBEO Business Services. There’s the perception that a capital gains tax increase under the Biden Administration could be in the offering, but such a move—while it may not take place in the near term—could be compelling for sellers to make a deal sooner than later. However, taxes (like a downturn in the economy) can be difficult to forecast. In the interim, Sheffield sees sound economic circumstances that favor transactions.
While conditions can turn on a dime, Sheffield believes sellers can capitalize, at least in the short term. “We’re seeing multiples in the 4-6X (EBITDA) range,” he said. “For really good companies, that number could go up.”
The ability to generate recurring revenue has always been a driver to companies seeking to sell, according to Doug Albregts, CEO of Marco. He notes that the trajectory shows traditional copier business continues to be worth less, and moving forward, diversification will be one of the key value propositions.
In terms of outside influencers, Marco’s Jennifer Johnson—the company’s executive vice president of acquisitions and integration—believes the pace of state re-openings and its impact on the office environment will dictate how brisk activity will be by the end of the year and into 2022. “People and businesses are still getting their footing and thinking about what our days will look like once we exit the pandemic,” she said. “Reality has not quite set in, but it will fuel activity in the coming months.”
Dan Ruhl, partner with Oval Partners—Flex Technology Group’s private equity backer—anticipates a greater volume of deals during the first half of 2022 compared to the balance of this year. Stability in the business markets—driven by activity resumption, schools reopening unfettered and confidence that the pandemic is fully in the rearview mirror—will bolster confidence.
As for Flex Technology Group, Ruhl notes the organization is fully back to seeking out candidates to add to its stable. He believes the pace of activity will quicken after a post-pandemic cooling off and assessment period. COVID fatigue, he believes, is quite real.
“Stability is the key, along with the optimism that we’ve put all of this behind us,” he said.
