The Esko/Artwork Systems Deal: The Inside Scoop

By Cary Sherburne, Senior WTT Editor

August 9, 2007 -- Last week, key industry players Esko Graphics and Artwork Systems announced that they had reached an agreement to combine their businesses. The resulting new entity, with estimated 2007 revenues in excess of EUR 180 million and a combined workforce of close to 1,000 professionals, consolidates the market leadership of both companies in packaging and printing pre-production products and services in Europe, the Americas and Asia Pacific. The target date for completion of the purchase is August 9, 2007.

WhatTheyThink spoke with Carsten Knudsen, who is currently the CEO of Esko-Graphics A/S and will become the CEO of the combined group; and Guido Van der Schueren, who is currently the chairman of the board of directors of Artwork Systems Group NV, and will become the Chief Commercial Officer leading the new group’s integrated marketing and sales operations, to get the inside scoop on the deal.

Carsten Knudsen (CK)	Guido Van der Schueren (GVS)

WTT:  Gentlemen, thanks for speaking with us, and congratulations on this announcement.  Esko Graphics and Artworks Systems have been longtime competitors.  What prompted the discussions that resulted in this acquisition?

CK:  From the Esko side, we strongly believe that in order to continue to grow our business, we need to expand our technology further into the software and systems integration market, and this combination is an opportunity to pursue that strategy.  That is the reason we engaged in these discussions.

GVS:  I started talking to Esko about a year ago, and those discussions were driven by more or less the same drivers, the industry consolidation, and the fact that we were lacking in hardware solutions which sometimes affected our sales.  This was a nice opportunity for both of us.

CK:  It is true that we were in competition in some instances, and I actually thought there were more of such instances of that than there turned out to be.  When we went through each other’s records, the overlap was actually pretty limited.

GVS:  Yes, of course we ran into each other in the marketplace, and the customer base knew about both companies, but in about 70% of the sales engagements at Artwork Systems, there was no competition between the two.

WTT:  As Andy Tribute pointed out on WhatTheyThink following the announcement, It seems that the valuation of Artwork Systems is high, considering that that acquisition values the company at about US$268 million, while the company has only been generating revenues in the range of about US$63 million.  How do you explain this?

CK:  Artwork Systems is a listed company, and there is a market price on a listed company.  We evaluated whether this market price fairly reflected the value of that company, and our assessment was that it did.  We believe there is significant value that Artwork Systems will bring to the combined entity.

GVS:  Artwork Systems has a 36% EBIDTA, and you have to look closely at that rather than focus on turnover.  As Tribute points out, the valuation is about 12 times EBIDTA, but these are not unusual prices paid in the market.  You can argue that your share price is too high or too low, but the market makes those decisions.  It is true, however, that this is a good deal for the Artwork Systems shareholders, and it is a good deal for the combined entity as well.  I personally will be investing in the new company, so I clearly believe that there is good value in the combined entity.

CK:  Keep in mind that there is a standalone value and a combined value.  The standalone value is there, but we also believe we can take the combined entity one step further and as a result,have a stronger combined offering in the market.

WTT:  What are the components of the Artwork Systems portfolio that Esko found the most attractive and what type of consolidation do you expect to see going forward?

CK:  Although there is some overlap, there are clearly areas where Artwork Systems has a stronger play, particularly in print pre-production outside of the packaging and flexo markets where Esko is particularly strong.  During the integration, we will concentrate on these areas to enhance our combined offerings.  Enfocus has a very strong and focused distribution channel as well, which we will start utilizing for some of the Esko products.  At Esko, we have for some time been working to take some of our technology from the high end, high value offerings we are best known for and to put these into more entry level products and plug-ins.  We see some synergies with Artwork Systems and Enfocus in that regard as well.

If you look at the two companies, Artwork Systems has been stable in terms of turnover, and has made a number of investments in new products that are in the pipeline, just as Esko has.  And at Esko, we have a significant number of open positions as we have moved ourselves into growth mode.  There will be areas where we will combine staff, of course, for a more efficient operation, there is no doubt about that, but overall we will be continuing in growth mode.  At Esko, we have been working to optimize the way we do business and ,in fact, we now have an even stronger, more profound opportunity to do so.

GVS:  Even though there is some overlap on the product side, we do not have any plans to change our product portfolio in the immediate future.  Of course, over time, we will have to see how we can best serve our customers, Customers invest in our products, and they count on new versions and upgrades to both hardware and software, and we are going to continue to be aggressive and offer the best solutions in the industry.

WTT:  How about distribution channels? 

CK:  We both have significant distribution channels, and we will leverage those.  For example, Artwork Systems is stronger in Latin America, and we can take advantage of that for Esko products.

GVS:  In the U.S., both companies use Pitman, so there will be no change there.  We don’t see distribution as a big area of change for us at all.

WTT:  This deal is going to be concluded very quickly, it seems.  I believe it would take much longer under U.S. law.  Is this the normal process in Europe?

CK:  Anti-trust proceedings hold up deals in both the U.S. and Europe, but I think this deal falls below the radar on that.  The Kodak/Creo deal took six months and anti-trust was a driving factor in that timeframe.  Some large deals take that long in Europe, as well.  It is more about the size of the deal than it is about the U.S. or Europe.

WTT:  What should the market expect to see in terms of future direction and new product development?  Will you shift the hardware/software mix, since Artworks was all software and Esko is a blend?  Do you anticipate divesting any portions of the combined business?

CK:  We will be continuing with our combined portfolio, and of course, will be keeping a close eye on what the market demands.  Both companies have been very successful at analyzing what customers want and meeting those needs.  That will continue.  As I indicated earlier, don’t expect big changes in our combined offerings in the near future.

WTT:  I assume you will have a joint presence at drupa and perhaps some new offerings there?

CK:  Yes, we will have one booth.  We are clearly too small to take a whole hall!  It is too early to be specific about what might be new at drupa, but you can imagine that there are plans in the works.  It is not like companies wake up at the beginning of 2008 and say what are we going to do at drupa.  The basics are already in play.

GVS:  Both companies have many good customers who have trusted their business to us for a long time, and we will continue to honor those relationships.  As Carsten says, both companies are hard at work on new products and I am sure you will see evidence of that at drupa with our combined presence.

WTT:  Gentlemen, I know you are both very busy as you work to conclude this transaction and begin the integration work.  We sincerely appreciate your taking the time to share your thoughts with us and will look forward to seeing you both at Graph Expo and at drupa, as well as watching the integration unfold.

Cary can be reached via email at cary@sherburneassociates.com, online at www.sherburneassociates.com and by telephone at 603-430-5463.

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