Response to another blog visitor's comments and questions.

Another (different) blog visitor posted a comment under a post I did on January 27th, and, in addition to making comments, he asked a few questions. Since his questions were thought provoking, I’m going to respond to the questions he asked. Since I don’t work for ARC, the responses I’m going to give, below, are, with one exception, “general to the reprographics industry.” In several places below, within his commentary, you will see “Joel’s response.”

“Joel,”

“I really appreciate the blog (there's not much out there with an insider's view on the repro industry). Like the previous questioner, I've been following ARC for some time with a view to investing.”

“There have been quite a few "roll ups" that have failed for the reasons you responded to above (ie the owner/manager who was the business driver gets bought out and leaves) and this is usually offset by the argument about size, efficiency and national scale. Along these lines, what are the key factors for a customer in deciding which repro firm they will use? How much of it is service vs. cost? Does having a national footprint really matter given most of the actual work is for local jobs? What competitive advantage would ARC bring to the table that another large local firm could not?”

Joel’s response:
As to the first two question, “Along these lines, what are the key factors for a customer in deciding which repro firm they will use? How much of it is service vs. cost?” ….. Inasmuch as I gave a 2 hour presentation in Europe on January 22nd on “The Issue of Price in the Sales Process”, the opinion I’m going to state is very fresh in my mind (the latter, a feat for someone who is nearly 63 years old!). During the presentation, we required the audience (Sales Managers from various places) to call-out the factors that they felt customers and prospects consider when trying to determine which reprographics vendor to give their business to. While I’m not going to list the factors in this post (since I am a consultant, there are issues that I won’t cover in great detail in my posts), we ended up with a list of approximately 20 different factors, price being one of those. Let me repeat, “price” being “only” one of those. There are certainly customers and prospects who consider price to be the most important factor, but, based on nearly 40 years experience in the reprographics industry, there are many, many, many customers who don’t consider price to be “the” most important factor. My opinion about this is that there is a difference, buyer mind-set-wise, between “product-based” businesses and “service-based” businesses. Price is more likely to be more of a factor in a “product-based” business, but, to the opposite, less likely to be the most important factor in a “service-based” business. The reprographics business is, most certainly, a “service-based” business. One other factor that makes “price” less of an issue, at least in the U.S., is something I’ve mentioned in a (or several) previous articles I’ve posted on my blog …. That “something” being this key word, “reimbursable”. In the U.S., many A&E firms are “reimbursed” (by Project Owners) for printing expenses they incur on projects. That, alone, makes “price” less of an issue rather than more of an issue. In addition, Architecture firms are very demanding customers; rightly so. They operate under tight deadline pressures. Their final “deliverables”, after sometimes months and months of hard, tedious work, are the “plans and specifications” they produce. I have yet to deal with an Architecture firm that would sacrifice (let us say “risk”) quality, correctness, and turnaround just for the sake of “low” price. In addition, there are some customers who work on a “cost-plus” basis with their clients. If you reduce the “cost”, then you reduce their “plus.” You also asked these questions, “Does having a national footprint really matter given most of the actual work is for local jobs? What competitive advantage would ARC bring to the table that another large local firm could not?”, so let me now respond to those two ….. a) even though “projects” are “local”, there are many large “regional” customers and quite a number of large “national” customers who find it highly appealing “to strike one deal that applies everywhere they operate”, b) more and more, A/E/C customers are moving away from “print, then distribute” and adopting “distribute, then print”; this, because time-is-always-of-the-essence and because of transportation costs. (E.G. Perkins & Will Architects designed a beautiful hi-rise condo near my office in downtown St Petersburg, FL, but Perkins & Will does not have an office in the Tampa Bay (St Pete) market area. A lot of the printing for that project was done in downtown St Petersburg.) Anyway, my opinion is that reprographics firms who have either “regional” footprints or “national” footprints have an advantage over reprographics firms who do not, especially for “larger” projects, where some of the project participants do not maintain offices where projects are actually located. Offset-printing enterprises, who’ve done roll-ups, do not, I believe, benefit from their geographic footprints as much as reprographics firms (who’ve done roll-ups) do. They are completely different businesses, and geo-scope is more important for reprographers than it is for offset printers.

“From an outsiders view I can't figure out what all these acquisitions bring to the table other than immediate size and scale. The cost saving/efficiency argument is usually more than offset by the loss of the driving force for that business (they bought out owner). Unfortunately, ARC doesn't disclose the multiples they are paying for businesses or how they perform post acquisition to prove out the strategy.”

Joel’s response:
I don’t agree with the conclusion you’ve drawn. For reasons I stated in an earlier post (my response to another blog-visitor’s questions), I do not feel that the loss of a retiring owner, if transition-planning from the former owner to a new “local” boss is done with all due care, attention, training, mentoring and support, is going to cause much harm to the business that was acquired. (Unless, of course, the acquiring company is totally stupid about “who” is selected to run lead a local operation.) And, don’t underestimate the cost-savings-power derived from size and scale (economies of scale); these (cost savings, due to size and scale) are very, very significant in the reprographics industry. As to your question about the multiples ARC pays for acquisitions, ….. even though I could provide you the numbers for some of the acquisitions ARC has completed ….. I am not going to provide any information about that. (There are a couple of reasons why I won’t do that, but I’m not going to explain those reasons.) ARC is a publicly-traded company, as you know, and publicly-traded companies have to follow “disclosure rules” regarding significant, and not-significant, acquisition transactions. If I’m recalling this correctly, ARC’s acquisition of Ridgway’s was a “significant” acquisition transaction; meaning that if you want to do the homework to figure out “the multiple” that ARC paid for Ridgway’s, you could probably figure what the multiple was, if you are willing to do the research and math. I’m not saying that ARC paid the same multiple for every company it has acquired, but, at the very least, that would give you an answer that you may not have.

Joel's further comments:
I am, as you might be able to tell from the responses I gave, an advocate of the "roll-up" methodology.

“Thanks for your thoughts on this. It's great to be able to get honest, unbiased views from an insider.”