M&A is well underway in 2023.

At the start of year, mergers and acquisitions have come at a quick pace in the North American promotional products industry.

It’s a phenomenon that continued a trend from 2022 and that was driven by a variety of factors, including strong industry sales last year, an aging population of owners ready to exit their companies, the presence of more private equity money in promo, and a desire to gain the capital clout/resources necessary to better compete and scale at a time when doing business has gotten more expensive, executives say.

Even so, industry leaders ASI Media spoke with say factors like rising interest rates and a potentially weakening economy could curtail at least some deal-making as 2023 progresses. Still, most believe the industry’s acquisition action will continue this year.

“No doubt M&A activity increased in 2022 and has continued thus far in 2023,” says Jamie Watson, a partner at Certified Marketing Consultants, an Indiana-headquartered firm that specializes in advising promotional products companies on private sales, acquisitions, business valuations and more. “Activity includes actual transactions and also valuations for owners who are considering listing their companies for sale in the near term or developing future succession plans.”

M&A Accelerators

After a lull during the earlier days of the COVID-19 pandemic, mergers and acquisitions reignited in promo on the backend of 2021. The business purchasing pace has continued.

One factor driving deals announced in the latter half of 2022 and early 2023 was that many distributors and suppliers generated robust sales last year, making it a good time for those interested in selling their businesses to look for a buyer. Distributors collectively generated year-over-year quarterly sales increases of 5.4% in Q1, 13.5% in Q2, and 12.4% in Q3, according to the Distributor Quarterly Sales Survey from ASI Research. Final numbers for Q4 and the full year are forthcoming.

“With many distributors and suppliers posting record-breaking sales figures in 2022, it was a natural time for those who were potentially looking to sell to ‘strike while the iron is hot,’ so to speak,” says Chris Anderson, CEO of Top 40 supplier HPG (asi/61966) and a member of Counselor’s Power 50 list of promo’s most influential people. “This, combined with a continuing wave of industry consolidation, led to strong M&A activity.”

Watson offers a similar assessment. “There are distributor owners who set specific financial goals to hit before they sell and many of them hit those goals in 2022 and are looking to capitalize on the ‘sell high’ strategy,” says Watson, whose CMC is an affiliate of ASI, parent company of ASI Media.

Another reason M&A has been brisk is that significant numbers of owners in the industry have been advancing in years and are looking to the next stage of life, executives say. “On the distributor side, there are many owners approaching or exceeding retirement age who want or need to consider exit strategies,” Watson explains. “This has perhaps been accelerated by the realities of increased risks from issues like the pandemic and economic uncertainty.”

Marc Simon, CEO of Top 40 distributorship HALO Branded Solutions (asi/356000) and a Power 50 member, has spearheaded one of promo’s most successful acquisition strategies in recent years, with HALO purchasing multiple other Top 40 companies, including BrandVia Alliance in 2022. Simon believes “succession planning and generational turnover” are definitely compelling M&A and adds that there are other factors in play, too.

Those include what Simon describes as a market-driven need to invest in expensive updated technology and customer demands for added capabilities that require far greater scale.

“In many cases, the founders of highly successful mid-sized companies have taken those businesses as far as they can unless they’re prepared to commit significant capital to technology and to added capabilities – and commit to an additional five- or 10-year horizon to create the value those investments are meant to garner,” Simon shares. “It’s understandable that founders would be unwilling to take the risks and devote the intense personal focus necessary to realize those potential benefits when the desired environment exists elsewhere with another company and an attractive liquidity event could be achieved.”

On the supplier side, rising costs for inventory, production and labor, along with the lingering effects of sales declines experienced earlier in the pandemic at some firms, have played a role in fueling acquisitions. Labor shortages have been another acquisition accelerant among suppliers, Watson stresses. “Consolidation and assimilation of supplier companies provide economic and marketing synergies, while allowing for the pooling of resources, such as labor” and technology, she says.

“With many distributors and suppliers posting record-breaking sales figures in 2022, it was a natural time for those who were potentially looking to sell to ‘strike while the iron is hot.’” Chris Anderson, HPG

Private equity investment in promo has been increasing for years. That’s another variable driving M&A. 

Broadly speaking, PE executives view quality promo firms as a good investment, as they believe the fragmented industry provides ample opportunity for market share gains through the driving of efficiencies and strategic acquisitions. As such, PE-backed promo companies like HALO, HPG, and Top 40 supplier S&S Activewear (asi/84358), along with others, have been among the most aggressive in purchasing other promo products companies.

“Many of these deals involving larger companies are private equity, which is a sign of a healthy industry,” says Watson.

Indeed, private equity money has powered some of the biggest acquisitions the industry has ever seen, such as HPG buying fellow Top 40 firm Evans Manufacturing (asi/52840) this year, and contributed to the multiplying instances of one high-revenue industry firm buying another. More could be on the way.

“Large companies,” explains Anderson, “need to make large moves to swing the value creation needle in their organization – which, in the case of M&A, means that acquisition targets need to be of increasingly large size.”

Outlook for 2023

In some respects, M&A in the promo products industry appears to have gone against the grain of the general market.

While executives say acquisition activity in the industry was muted in the first half of 2021, that year saw a record level of global mergers and acquisitions.

Across industries, worldwide M&A volumes in 2021 surpassed $5 trillion for the first time ever, reaching $5.8 trillion, a 64% year-over-year gain. As acquisitions heated up in promo in 2022, total M&A retreated from the record pace, falling 37% globally and 43% in the United States year over year through Dec. 20, according to one analysis.

37%
Year-over-year decline in global M&A through Dec. 20, 2022.

(Dealogic)

Nonetheless, the record pace of 2021 was never going to be sustainable and the global M&A levels seen in 2022 were about in line with annual pre-pandemic averages, analysts like Ernst & Young note. And, while the contraction of M&A was pronounced in the fourth quarter of 2022, there are those who believe deals will continue in 2023, though not near 2021’s levels.

“Despite the macro and geopolitical environment, well-capitalized strategics are still going to do deals that are important for their long-term business strategy,” Ivan Farman, co-head of global M&A at Bank of America, told Reuters.

“What we are experiencing right now certainly indicates a strong level of activity for 2023.” Jamie Watson, Certified Marketing Consultants

If that proves true, then it would seem promo may now be in line with the bigger M&A trend. Despite the fast pace of industry M&A at the start of 2023, executives at this point aren’t predicting a record year for promo acquisitions and say a sagging economy, rising interest rates and lending market pullbacks could dampen deal-making. Nonetheless, they believe a notable number of acquisitions will still proceed due to factors that include those that have propelled the activity over the last year and a half. Also, if the economy were to really nosedive and promo demand drop precipitously, it could create increased opportunities for still well-capitalized industry companies to buy market peers that suddenly find themselves in distress.

“Consolidation will continue at a meaningful pace,” says Simon, adding that he expects “activity to increase in the second half of the year.”

Says Watson: “Activity can escalate or decline suddenly based on evolving economic and geopolitical issues since acquisitions aren’t necessary for buyers or sellers unless driven by distressed circumstances. However, what we are experiencing right now certainly indicates a strong level of activity for 2023.”