Anyone who follows the ARM industry has read recently about mergers and acquisitions involving some of the largest companies in the industry, including NCO Group and West Corp.
While these large transactions are impressive and certainly noteworthy, they only tell part of the story. What about the deals involving smaller companies?
We estimate that over 95 percent of the companies within this industry generate less than $8 million in annual revenues. Buyers seeking opportunities in this space are interested in these companies and do not limit their interest to the very largest of potential acquisitions.
Kaulkin Ginsberg has been tracking M&A deal activity within the ARM industry since 1991. Throughout this history, we’ve come to understand that the distribution of transactions within the ARM industry is much like the distribution of ARM companies themselves.
The value of ARM transactions in 2006 is approximately $3.1 billion, the bulk of which was generated by transactions involving NCO Group, West, and other large ARM companies. However, the majority of the deal volume was generated by companies much smaller in size.
In 2006, Kaulkin Ginsberg confirmed that 68 transactions took place within the ARM industry. Of this amount, only five (7%) had purchase prices greater than $100 million and only three (5%) had purchase prices between $50 million and $100 million. Of the remaining 60 transactions, 15 (22%) sold for between $10 and $50 million, and 45 (66%) for less than $10 million.
This of course does not necessarily mean that owners of larger ARM companies are receiving poor prices for their companies. Quite the contrary, companies of all sizes have sold for attractive market multiples. How are these companies being valued?
Buyers typically apply a multiple to adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to value receivables management companies. The EBITDA value is typically adjusted for certain excess and/or non-recurring expenses that will not exist post-transaction, such as expenses for shareholders that are not active in the company.
Over the past 18-24 months, market multiples for ARM companies have risen above historical norms. Previously, ARM companies generating less than $10 million in revenues normally sold within a range of 3 to 5 times adjusted EBITDA. ARM companies generating north of $10 million in revenues would typically sell for 4 to 6 times adjusted EBITDA or more, depending on the amount of deal structure (earn outs, seller’s note, retained equity, etc.) incorporated into the transaction.
Over the past 18-24 months, multiples for ARM companies generating less than $10 million in revenues have increased to a range of 4 to 6 times adjusted EBITDA, and companies generating $10 million or more in revenues are receiving 5 to 7 times adjusted EBITDA, and exceeding 7 times in exceptional instances.
So while there is some discount for smaller companies pursuing exit opportunities relative to the largest sellers, prices paid for these companies have increased relative to historical norms. For example, a company that has annual revenues of $8 million and an adjusted EBITDA of $1.5 million might reasonably expect to sell for an enterprise value of $6 million to $9 million. Where the price falls within this range will depend in large part on the particulars of the selling business, including how well it fits with the buyer’s needs.
Whatever the size of a company being sold, mergers and acquisitions in the ARM industry reflect its vibrancy. These transactions afford owners the opportunity to liquidate their accumulated equity in a business and give new owners the opportunity to take a company to the next level. This activity is taking place frequently throughout the ARM industry, and not only among its largest competitors.
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