Whoever was holding Dan Doyle Jr.’s proverbial beer has to be impressed, as is the rest of the office dealer industry, with DEX Imaging’s acquisition of 10 Konica Minolta direct branches this week. But a quality fireworks display wouldn’t be complete without a few surprises that elicit “oohs” and “aahs.” And that’s precisely what we will be seeing over the summer months and into the fall—fireworks galore.
Of course, Doyle wasn’t trying to make the biggest splash or outdo his dealer neighbors, but the acquisition is symbolic of how dealers and manufacturers will position themselves from a strategic standpoint in a post-pandemic business world. Priorities and visions have changed or at least been altered, and whether it’s through additions or divestitures, strategies will be cast to find the best (and most profitable) road forward. That was the goal for both DEX and Konica.
We queried our June State of the Industry M&A panel to get their views on how the pandemic has influenced the pool of available sellers. Dealers generally refer to their pipeline, that figurative supply of prospective acquisitions in the negotiation stage, which may or may not be populated with distressed companies. The availability of Paycheck Protection Program (PPP) funds in 2020 was a welcome source for many businesses. But while it kept payroll humming along, some have theorized that the stopgap may have prevented businesses from making long-term staffing assessments that would keep overhead in line with reduced revenues.
Fish or Cut Bait
One thing the pandemic effectively did was push executives in the twilight of their careers closer to their exit strategy. Applied Imaging President John Lowery feels that companies without a clear succession plan—such as next-generation leadership for family-owned entities—might well trigger older executives to seek an exit.
“I think there’s a fair amount of people who are saying ‘I’ve had it and I’m ready to move along.’ So I do think there are plenty of opportunities on the acquisition side,” he said. “And a lot of executives are riding this out. It gets tougher and tougher to compete based on size, and we’re seeing that even with manufacturers. If you’re a strong, solid regional dealer or a big player, a company in the over-$20 million range, growth is not as much of an issue. It’s tougher for those $1-3 million or even $5 million dealers to scale. I think they are great targets and there’s a lot of them out there.”
Jim Sheffield, CEO of UBEO Business Services, sees an influx of prospective sellers who didn’t fare as well in navigating the pandemic and are building back as best as possible prior to engaging in talks, whereas others have been more strategic (and successful) in dealing with the COVID-induced downturn. But did the PPP funds mask the need for dealers to make the aforementioned difficult choices?
“Without the government money, a lot of these organizations would have really been hurt,” he said. “Granted, they probably didn’t make some hard decisions about their companies because they had the government money.”
Funding Bandage
Absent the PPP monies, Dan Ruhl—a partner with Oval Partners, the private equity arm behind Flex Technology Group—believes there would have been considerably more inquiries from companies in distress looking for an exit. He believes the funding bandage actually enabled dealers to figure out how to right-size their business during the pandemic and ensure it was profitable at a lower revenue base.
In looking at prospective companies, the long-term impact of the pandemic needs to be taken into account. “There are two potential places of damage related to COVID when it comes to companies within the industry,” he said. “The first is damage to the customer base, and the revenue of the business moving forward. The second one is how much new investor interest is there going to be in print, and what are the multiple going to look like, given the prospects aren’t as good today as they were pre-pandemic? Both of those elements put pressure on value for everyone who owns a company in the industry.”
While Marco’s pipeline continues to be robust and conversations are ongoing with a number of acquisition candidates, Jennifer Johnson—executive vice president of acquisitions and integration—believes many dealers are trying to understand how their businesses will be impacted long term.
“Most, in the short term, are seeing positive or even improved cash flow and are not distressed,” she said. “Many have been able to access the federal COVID-19 relief funds and reduce costs to manage the downturn. The pandemic served as a catalyst for companies to understand they have to diversify. The outcome is yet to be determined.”
