The State of the Industry: What is Next for ARM?

Mergers and Acquisitions are still active, but some buyers are changing strategy

We calculate that the total deal value in 2007 was $1.65 billion from 48 completed transactions. 2007 was characterized by fewer total transactions compared to 2006 but at comparatively higher values. If you pull out the 2006 management-led buyout of NCO Group and the recapitalizations of West Corp and Cabot Financial, which accounted for roughly two-thirds of the total deal value for the year, the total for 2007 is consistent with 2004, 2005, and 2006 levels.

Looking to the year ahead, financial and strategic buyers will continue to actively seek deals in the ARM industry and favorable transactions will get done with top performing companies that are well positioned in their respective market segments. However, some buyers may become more conservative with their valuations for a couple of reasons. In some collection market segments, liquidation results are tracking down, causing some buyers to become uncertain about where these markets are heading in the short term. The credit crunch is also starting to impact financing of some larger size transactions as lenders are raising concerns about economic conditions overall. In general, smaller and mid-size M&A transactions, which comprise most of the transaction activity in the ARM industry, are faring better because the debt-to-EBITDA ratios remain relatively conservative.

One point to note that may have a positive impact on M&A transactions in the U.S. is that the dollar has fallen to a record low against the Euro and now stands at its lowest value in a decade when compared to over 20 other currencies. This may spark more investing into U.S. companies and into the ARM industry in particular. Exchange rates are volatile, and although this has not had an impact on M&A in the ARM industry in previous years, it might be too attractive an opportunity for foreign buyers and investors to pass up.

All told, we are confident that M&A transactions will still get done at competitive price levels with top performing companies. Even less attractive companies will sell so long as buyers and sellers are willing to share the risk. To bridge gaps, transactions may include more structure – such as earn-outs, equity retention, and seller financing – instead of the all-cash transactions that have been more prevalent in recent years.

Strategic buyers continue their acquisitive ways
Business Process Outsourcing (BPO) and CRM companies continued to aggressively acquire U.S. ARM companies. We expect this trend will continue well into 2008 and beyond as these strategic buyers seek to expand their service offering to include ARM. Consider that in 2007 alone:

• Indian business conglomerate Essar Global acquired Global Vantedge, an India-based ARM and business process outsourcing provider
• Ocwen Financial acquired Nationwide Credit
• West Corporation purchased Omnium Worldwide
• France-based global BPO firm Teleperformance acquired AllianceOne
• Firstsource Solutions, Inc., based in Mumbai, India, acquired MedAssist Holding, Inc. of Kentucky

Collection Law Firms are fast becoming attractive M&A targets
Collection law firms are the smallest but fastest growing segment in the ARM industry. Historically, law firms had very limited options when it came time for senior partners to retire or otherwise exit their firm. They either transitioned their practice to junior partners or they merged into another practice, resulting in transactions with insignificant amounts of liquidity at closing. This appears to be changing; some financial and strategic buyers are realizing that collection law firms are competitively well positioned to service major credit card issuers and other grantors amidst tougher economic conditions.

In 2007, we assisted in the sale of the non-legal assets of Wolpoff & Abramson, one of the country’s largest law firms focused on debt collections, to Axiant LLC, joining Eskanos & Adler and Mann Bracken to provide legal collection services to clients in the majority of the U.S. Many in the industry took note of this transaction and we are confident similar transactions will occur in 2008.