The U.S. economic climate is causing buyers across many market segments to take a more cautious approach toward acquisition opportunities, but the size and number of M&A transactions in the accounts receivable management (ARM) industry is consistent with last year’s results to date. In short; deals are still getting done in our industry despite the current economic conditions.
At the end of the first quarter there were nine completed transactions, the same as Q107, for a total deal value of roughly $461 million – more than three times the amount generated in Q107. Most transactions were among small to midsize ARM companies with deal values in the $5M to $50M range, with the exception of NCO Group’s acquisition of Outsourcing Solutions, Inc. for $325 million – a deal that represents over 70 percent of the total deal value for the quarter.
The types of transactions ran the gamut. In terms of buyer type, seven transactions involved larger ARM companies acquiring smaller ones, with the remaining two completed by one strategic and one financial buyer. Geographically, five of the total transactions took place among U.S.-based companies and four were cross-border deals, in which the buyer and the seller were based in different countries.
Due to the economy, strategic and financial buyers are becoming concerned with declining liquidation rates and are facing challenges associated with accessing debt to finance transactions. However, lenders are still financing deals. To account for any perceived risk in the transaction, buyers and sellers are starting to utilize deal structure – such as earn outs, retained equity and sellers’ notes – to bridge gaps in purchase price.
We expect continued interest in the ARM industry from both strategic and financial buyers who are looking for platforms, but we anticipate that most buyers will be larger ARM industry companies – particularly those that are private equity backed – seeking strategic add-on opportunities that allow them to enter new markets, expand their service offerings, and/or increase market share.
This is especially true for companies in niche markets of ARM like healthcare. In February, The Outsource Group (TOG) acquired California-based J.J. Mac Intyre Co. Inc. – one of approximately 10 similar transactions involving healthcare ARM firms completed over the past 18 months. We think this is a trend that will continue in 2008.
Cross-border M&A transactions are gathering momentum, as evidenced by U.S.-Based Galaxy Asset Management, LLC’s acquisition of a controlling interest in International Risk Management (IRM), a collection operation with a call center in Mexico. In March, Netherlands-based Intrum Justitia, a leading credit management services firm, acquired Solutius Belgium, owner of two Belgian collection firms. The transaction will allow both companies to capitalize on significant synergies between them.
European ARM companies may begin to seek platform acquisition opportunities within the U.S. market to augment their growth, leveraging additional value from the differentials in the monetary exchange rates as well as the acquisition multiples being paid for European ARM companies vs. their U.S. counterparts. The U.S. ARM industry is by far the largest and most mature in the world. With the U.S. dollar struggling against most other currencies, this could be an ideal time for European and other international firms to buy their way into the U.S. market.
Looking to the rest of 2008, we anticipate the ARM industry to produce well north of $1 billion in total value and may exceed 2007’s deal value total of $1.65 billion, depending on pending transactions in Europe. In terms of deal volume, we expect the number of transactions to pick up by the second half, and the total for 2008 should exceed 2007’s results.
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