It seems as though we are always waiting for the federal government to avoid some major calamity and at the end of 2012, it was no different with our politicians battling it out till the last possible second to avoid the catch phrase of the year – the “fiscal cliff.” After a long, drawn out negotiation, the democrats and republicans reached consensus on January 1st, at least for the time being. In two months’ time, the media will be at it again, pumping everyone up to avoid the next political showdown, when our elected officials must consider raising the borrowing limit in February—failure to reach a compromise on this point could mean a default on U.S. debt or another downgrade in the U.S. credit rating.
Despite all of the political turmoil over the fiscal cliff, deal activity continues to be alive and well in the ARM industry. We have not seen deal activity slow down like in other industries. Later this month, we will be releasing the Kaulkin Ginsberg Q4 2012 Outsourced Business Services Sector Review, a report that will tally up all of the latest figures in M&A – keep an eye out for it on January 23rd. Q4 12 was extremely busy with deals that were in motion to close on or before December 31st, ahead of anticipated capital gains increases.
Here is a quick summary on a few of the noteworthy Q4 deals:
iQor’s strategic acquisition of CCT Group, a 4,500 employee call center and technology enabled outsourcing company. This was a transformational, strategic acquisition that helps to position iQor as a BPO company rather than simply an ARM company. Earlier in Q4, iQor made another strategic move where they acquired HardMetrics, a cloud-based analytics and data company, to help enhance its data and analytics tools it uses and provides to its clients.
Another significant deal in Q4 was Portfolio Recovery Associates (NASDAQ: PRAA), who made a strategic move to expand their bankruptcy capabilities through its acquisition of National Capital Management’s (NCM) bankruptcy portfolio and other operating assets associated with the underwriting and collection of secured bankruptcy claims. The transaction also included the hiring of certain NCM employees.
What to Expect in 2013
We are expecting another active year for M&A in the ARM industry but it is going to look a little different than 2012. Here is what to expect:
- As the CFBP begins its oversight of the industry, some owners (agencies or debt buyers focused on the credit card sector) may decide to throw in the towel and decide to consider an outright sale or a merger. There is going to be a clear distinction between agencies and debt buyers who have withstood the CFPB’s auditing process and can use it as a competitive advantage when positioning to gain additional business as well as even attracting a potential buyer target.
- Small and mid-size financial services focused debt buyers who can’t compete at purchasing portfolios will seek to sell their portfolios to the larger private equity backed our publicly traded players and if successful, convert into a contingency servicing model or leave the industry entirely for a period of time.
- A number of former industry executives will be coming off their non-competes and will likely re-enter the industry through an acquisition of an agency or a debt buying company.
- Call center and BPO companies who are looking to bolt on an ARM capability (first party ARM firms will be preferred), will be out in the market looking for strategic acquisitions.
- With all of the compliance pressure that the CFPB plans to apply on the credit card issuers, I wouldn’t be surprised if one or two of the top five issuers went out and acquired one of their ARM vendors.
- Platform and add-on acquisitions in the healthcare, student loan and government arenas will continue to attract both strategic and financial buyers. Additionally, credit card agencies seeking to diversify will be out in force trying to make deals happen with agencies in these asset classes.
Despite the increase in capital gains that took effect on January 1, 2013, there will continue to be strong level of deal activity in the ARM industry driven by the following:
- Buyers ability to access cheap debt financing to complete acquisitions.
- Agencies and debt buyers who are focused in financial services will need to diversify into other asset classes via acquisition (doing it organically will be time and cost prohibitive) as credit issuer vendor networks continue to be consolidated.
- Some agencies will be more inclined to merge or sell rather than deal with the oversight of the CFPB by themselves.
What do you think will happen in 2013 from an M&A perspective? If at all, how do you see the CFPB having an impact? I look forward to your commentary.
Michael D. Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg’s Strategic Advisory team. Michael can be reached directly from Kaulkin Ginsberg’s Philadelphia, PA office at 240-499-3808 or by email. You can also read his blogs, follow him on Twitter, or network with Michael.
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