Over the last five years, the office technology industry has been characterized by two distinct trends. The first, page volume decline, has been a tumultuous storm exacerbated by a pandemic and acceleration in remote work arrangements and digital alternatives to paper communication. The second has been the rapid consolidation of retail dealers through continued mergers and acquisitions. One of the more interesting dynamics in our industry is the consistency related to M&A. Despite the challenges imposed by COVID and the more recent economic conditions, M&A has plugged right along. What then can we expect for the remainder of 2023 and looking ahead to 2024?
Before answering this question, let’s look at the specific type of M&A that is occurring in today’s industry. When doing so, we recognize that there are three general scenarios taking place, including OEM acquisition of dealers, dealer acquisition of dealers and private equity investment/acquisition of dealers. Despite the announcement between Toshiba Tec and Ricoh, we haven’t yet witnessed any significant OEM consolidation so long anticipated.
With respect to the three major types of acquisition activities present in today’s market, it’s safe to say that dealers acquiring dealers and private equity-related investments are the two most prevalent, and here the tide seems to be turning. While during the last several years we have seen our fair share of both types of acquisitions, private equity seemingly took center stage. As a new entrant into the industry, private equity quickly gained industry scale with investments in major industry players. As of late, the influx of private equity dollars has seemed to cool. Is this a question of today’s economic conditions or fewer viable targets? Maybe both. Suffice it to say, PE-related activity is likely to take a continued back seat to dealers gobbling up other dealers. And why not? Economically speaking, dealers are in the best position in today’s industry. With limited geographic footprints by comparison to OEMs and positive cash flows, dealers are well-positioned to utilize M&A as a core strategy for growth.
In fact, despite the increasing cost of capital due to rising interest rates, we must remember that dealer M&A is not as capital-intense a process when one considers that most acquisitions are made by larger dealers generally possessing significant cash on their balance sheets. As such, the need for external financing is not as significant as might be required for an OEM acquisition by comparison. It should also be noted that those dealers who intend to be long-term players in many ways are being forced to consider M&A or run the risk that other dealers will acquire competing businesses in their local geographies, potentially creating more competitive pressure. For PE firms, cost of capital is a more significant factor given the size of investment typically being made and the underlying attractiveness of the return anticipated from dealer investment. However, despite today’s cost of capital, the stability of returns achieved from PE acquisition of dealers typically offers a nice hedge compared to other PE portfolio assets, making continued dealer acquisitions attractive.
As industries traverse their natural maturity curve, it is quite common that the number of industry participants will increase as the industry grows and will eventually shrink upon industry maturity. From this perspective, the office technology industry is following a natural progression. Although the print industry continues to evolve and, in doing so, will provide pockets of new growth opportunity, the general value associated with the overall market will continue to decline. Given this scenario, contrary to the challenges in today’s economy, dealer acquisitions will continue to take center stage through the remainder of 2023 and into 2024. Although private equity will likely remain active during this time, I would anticipate that dealers will lead the way in the acquisition of other dealers, helping to ultimately establish an ecosystem of megadealers and their not-so-small rivals.
So where does this leave OEMs? In all likelihood, it leaves them in the unenviable position of navigating a landscape where their channel partners are in constant flux. It also begs the question, when will major OEM consolidations occur? And what can one say concerning acquisition velocity as we look ahead?
Dennis Amorosano is the president and founder of Dendog Strategy Insights LLC, a management consulting firm focused on strategic planning, new business development and go to market execution. Providing services in the areas of strategic business planning/execution, new business development, content creation/marketing automation and technology sourcing support, Dendog Strategy Insights brings 30 years of technology marketing, sales, product planning, software engineering, and professional service experience to help clients implement strategies that yield success.