Ken Stack: The World of M&A for Industrial Inkjet: It's not all about the money

Ken Stack, Proximus LLC

Ken Stack, Proximus LLC

Ken Stack is speaking at the forthcoming InPrint USA Industrial Inkjet Conference in Chicago 1-2 May with James Hirchak (Dover Group) and Liz Logue (EFI) with a focus on M&A within the industrial inkjet sector. Ken Stack is President of Proximus LLC, a boutique M&A consultancy that is focused on helping others come together and do deals to the betterment of both sides. Ken's background is steeped in inkjet innovation.  Jetrion was Ken's innovation that he sold to EFI in 2006. And since leaving that particular role, his venture Proximus has been responsible for nearly $700M of deal value within the industrial inkjet industry since 2011. Ken will speak at the InPrint USA Conference on 2 May and will also host James Hirchak (Dover Group) and Liz Logue (EFI) around a discussion of M&A. Considering James and Liz are responsible for the majority of the deals that have taken place in the past couple of years, this promises to be a very interesting and insightful session.

Ken, around 7 years ago I saw you present and you mentioned at that time that corporate/strategic VC was significant for industrial inkjet – is this still the case?

Things have moved on since then. M&A activity has ramped up significantly and this is the key driver instead of VC. M&A within the industrial inkjet space remains a seller's market. Large OEM providers are all looking for acquisitions. Deals slowed down a little last year as there were not enough targets, ie not enough small companies to be bought. I get two to three calls a month from large companies looking for smaller inkjet companies to buy. This will continue as macro forces continue to drive demand.

Have attitudes changed towards inkjet in terms of risk?

Yes, they have, as many now believe industrial inkjet is the way forward. Not just for the wide format sector but for all the new application areas like textile, décor and packaging.
The recent Siegwerk/Agfa deal shows this as interest is also now coming from outside the norm. Until now, most of the M&A has been driven by public companies such as EFI and Dover driving the market.  Private equity-backed companies (PE) and family-owned private companies are starting to enter the market.  They are really seeing the opportunities and the direction and some of the value for the larger companies is that they have the channel and the right people in place, in order to be successful quickly. So we have to big avenues for investment.

But it is not all about the money. It's really about the people! Take a look at the Mouvent development with Bobst. Mouvent was created as a partnership venture with a small business called Radex. Bobst was looking to move into the digital markets. They already have the channel, world-class material transports and knowledge. What they invested in was the people, and they believed, rightly, that the investment they were making in the skills and experience of the people in the business. Radex has a world-class team of engineers who have brought inkjet products to market and developed intellectual property that was interesting to Bobst.  I'm excited to see what happens here as they are now going to market less than a year later.

So people are really understanding the value of inkjet now, particularly when compared with 2014?

What is different now to 2014, is that the sheer numbers of deals that were done.   Things really accelerated in 2015 and 2016. People seemed to have quickly understood the potential for inkjet, and they are no longer doubting the quality of the technology. Industrial inkjet began in the signage markets.  It then quickly moved to ceramics, to textiles, and to labels. These markets are well known and in many ways have consolidated, though textile remains a very hot market for M&A.  The future lies in the newer markets – what I call Industrial Inkjet 2.0.  Industrial Inkjet 2.0 includes décor printing, laminates, corrugated packaging, and direct to product printing.  Its clear to me that these new markets are going to drive a great deal of value over the coming decade, and smart companies are positioning themselves in the space, either thru M&A or internal development. If I think about the focus of most of the buy side interest I hear about, it's within Industrial Inkjet 2.0

Wide format is not growing anymore in double digits. Think of EFI, they had no choice but to shift into these new applications, and their new growth is driven by these new markets. Dover leapfrogged over wide-format and jumped directly into textile. People believe in these new markets and the technology is very capable – we are no longer debating if inkjet is robust enough for industrial purposes.  We no longer debate if the analog to digital transition will happen.  It's happening again and again in each of these markets. 

For the large office products companies, their core markets were not growing anymore. So the choice is quite easy. They stay in the office and decline. Or move into industrial inkjet and grow.  These large companies can leverage core technology, robust balance sheets and global presence.  Industrial markets are growing rapidly and they need that growth to help replace the declines in their core markets.  We will see more and more of them enter industrial inkjet in a serious way.

But it is again back to the people. You may see a deal and think it doesn't make complete sense. But what buyer's value more than technology and turnover is the right people to make something new happen! Every deal I do, I advise my clients to ask, is this the right team?  With Bobst and Mouvent – Radex had the right team and this is what Bobst invested in. This is a great example of every M&A deal I do. These large companies want to see where it is they take the company – rarely is it the technology alone, or channel alone, or product alone. The key question the buyers asks is this - can I scale this team and technology set to execute in a larger and bigger way?  

People may assume the buyer is price focused. But they are making strategic deals, and they are not purely financially focused. For a relatively large company with a turnover of $2Billiion, buying a company for $10-100 million isn't a big deal and it is not going to put the company at risk.  In my experience, it is rarely the price that gets in the way of a deal.  

So when you buy a company, what are the multiples? Are there set industry norms? 

Every deal is different but the averages are as follows:

For Systems companies in particular, (including printers, inks and software), assuming the company is growing and in a good market – 1.5 to 2.2 times revenue. This is a large range and not applicable to every single deal.  The higher the growth rate, the higher the multiple.  The reality is that systems companies have been consolidated and there is a lack of systems companies that are willing to be acquired.  They are becoming harder and harder to find. 
For Software and ink – larger multiples as the economics are different. 2 to 2.5 times revenue as they can scale faster and generally with less cost. Ink and software companies are incredibly valuable. So the inquiries I am getting are keen to talk to ink and software companies. Without ink, you can't go after the applications and the profit remains in the ink mostly, so this is appealing obviously.  There were numerous ink deals in the last few years, and I expect that to continue.

Software remains fairly fragmented and we will see a wave of M&A here.   I really think that software continues to be more important to the world we live in. If you look at our markets in print – the front end process becoming more critical. Having great software solutions is becoming mission critical. It is very hard to get software resources that also understand colour management, customer applications,  and software.  Users see software as a not only a part of their production process but also as a way to increase sales via solutions like web to print.  As orders get smaller and smaller the need to automate back-end processes becomes even more important.  

2015/2016 were the years of ink acquisition. Now you are seeing the software beginning to consolidate. I expect this to continue.  

So from a start-up perspective – the printer companies are simply not launching?

Exactly. Back in the early 2000s, there were many printer system startups.  The funding ecosystem was willing to take a risk on these companies in this new market of industrial inkjet. The market grew, many of these companies got traction, and most were acquired.  But rather than us seeing a host of new hardware startups, the launch rate has slowed from those days.  I think a lot of this has to do with the startup funding culture we now see.

Today’s startup culture is very different.  Software and services dominate because the risk is so much lower.  For a fraction of the cost of funding a systems company, investors can fund software businesses.  Much of the funding that was readily available years ago has moved to other markets.  This is especially true in North America.  Europe is a bit more forgiving, but the number of new systems startups are far slower then it was.  Ink companies are similar.  
For our industry, I think the focus for software will continue to broaden from just RIPS to workflow, colour management, they will move broader, business intelligence and there is a lot of value.

Recently I presented at a Chili Publish event, I was impressed with how committed and professional they produced the event and presented their marketing.

I agree, generally speaking, that software companies, at least compared with printer and ink companies, are outstanding marketers. They realise their marketing and go to market plans are far more sophisticated. Their thought process is they're trying to position a narrative about their business. Printer companies focus on speed and ink the same, and marketing can be an 'after' thought. Software companies have to tell a story and they attract creative people and they are naturally inclined towards marketing and communication.

Plus they attract a younger crowd? Is this as they are less attached to the print culture of old?

Yes, this is also true – so they are simply more in tune with today's culture of communication and thought leadership.

Give me an example of a recent software acquisition?

Well, the Caldera deal which went to Dover is an example and I promise you we will see more of them to align with what I call Industrial Print 2.0. 

Do you also see a future of strong growth for these new industrial inkjet markets?

Yes, these markets will explode no doubt. Corrugated and laminate - I think these will be the next phase. The next big phase for textile is already happening, but there is still a lot of room to grow there. 

What will be next after this?

Corrugated,  laminates, packaging, wallcoverings and furniture, and direct to product. If you go to anybody involved in industrial print, there is no debate, this is going to happen. It is just a matter of when.  Industrial Inkjet 2.0.

Where would you put industrial inkjet on the hype cycle?

You can't really put this in one place as there is so much diversity.
Ceramics and wide format has plateaued and already been in this state for a few years. There is no way to change that. When you are in rapid growth cycles it is about the conversion of analog to digital. If you think about textile this is in the conversion phase and growing rapidly and as it is a market that is so big there is headroom for textile to continue to grow. 

What is the next big application area?

It could be one of the following: 
•    Corrugated
•    Laminate
•    Direct to shape
•    Decor

So flexible packaging, this is technically very challenging, you see this tipping to inkjet also?
It is a really hard market technically and arguably the toughest as it is so close to the consumer. For example, if there is food inside the product this is a big challenge, and to top it off, it has high image requirements, many of the toughest substrates. But regardless it is converting. It is a question of when. Ink technologies are now coming out that are safer and we have more robust inkjet heads. 

Which one will be first? 

In terms of timing, I guess that corrugated is first, due to the relatively low barrier of technical entry we see a lot of the OEM's embracing this market, and the dynamics are similar to wide format as much of the content is placed in retail.

Flexible (Packaging) is very hard, so the next is likely to be décor, then DTS.  DTS is still hard, and we are still dealing with the food proximity issue. However, if you look at the sheer amount of effort for the food companies for food capable inks, this is a major focus for inks for packaging. Success will happen, and inkjet will play a larger role I have no doubt.

Direct to shape will come eventually, I am convinced. 

The common perception is that the US is behind Europe in terms of inkjet integration, is this the reason why?

Yes. In Europe industrial inkjet is regarded as strategic, it gets public investment through universities, the public sector, government etc. For example, in France, both MGI and Impika gained support from the government. In fact, I don't recall a European company that didn't get government or EU money. This doesn't happen in the USA. Partly because of this, European culture is more long-term in view and the USA isn't.

In the US I think the funding environment is much harsher  So there are some fundamental cultural and structural differences between the US and Europe. I know small companies in Europe that have been working on things 5-6 years that are still going. In the US this won't happen. 

Liz Logue (EFI), James Hirchak (Dover Group) will join Ken Stack at the InPrint USA Conference for a focus on Mergers and Acquisitions

So you will be presenting at the InPrint USA Industrial Inkjet Conference?

Yes I will present but we also have James Hirchak of Dover Group and Liz Logue of EFI, and I will be asking them some questions and we will be having a discussion about M&A for industrial inkjet! 

I am the guy in the middle of these deals but Liz and James are the people on the front line doing it every day and their insight is tremendous! Plus they are both really good presenters, so the session will be excellent. Really there are no better two people in the entire inkjet print industry who are placed to give insight and opinion about the development of inkjet from an M&A perspective.

Check out this session and more by joining us in Chicago for the InPrint USA Industrial Inkjet Conference 1-2 May 2018.

Contact Ken directly