ARM M&A Solid So Far and Foreign Deal Activity May Get Stronger

Mergers and acquisition activity in the accounts receivable management industry remained robust in the first quarter of 2008, even in the face of a flagging U.S. economy. But deals in markets outside the U.S. may be the primary driver of collection industry deal activity in the rest of the year, according to leading ARM advisory firm Kaulkin Ginsberg Company (KGC).

In its quarterly update of mergers and acquisitions in the debt collection space, KGC reported that nine deals were executed in the first three months of 2008, the same number as in the first quarter of 2007. But 2008’s total dollar value far outstrips last year due to the closing of the $325 million purchase of Outsourcing Solutions by NCO Group. That deal pushed total ARM deal value to $461 million, according to KGC associate Mike Lamm.

Seven of 2008’s nine transactions involved larger ARM companies acquiring smaller ones, while the remaining two were 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.KGC director Mark Russell said that “cross-border M&A transactions are gathering momentum.”

Kaulkin Ginsberg expects deal value in 2008 to outpace the numbers from 2007, but that prediction is largely dependent on some major European deals closing this year. One deal involving United Kingdom-based debt buyer Lowell Group was announced Monday (“UK Debt Buyer Acquired by Private Equity in $400 million Deal,” April 7). Lowell is being sold to a private equity firm for $400 million.

“The U.S. ARM industry is by far the largest and most mature in the world,” noted Lamm. “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.”

Even without cross-border deals, the collection industry is still poised for strong M&A activity despite the economy. “ARM tends to be more recession-proof than other markets,” said Kaulkin Ginsberg CEO Mike Ginsberg. “Placements and debt buying activity go up in an economic downturn and acquisitions become attractive for buyers.”

Russell noted that banks themselves drive a lot of ARM activity in difficult times. “Credit issuers have been increasing their reliance on outsourcing and debt sale,” he said. "That looks to continue."

Russell noted that valuations for ARM companies are not eroding. When a company is sold, the price is almost always determined by agreeing to a certain multiple of the company’s adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, normalized for any excess or non-recurring expenses. Russell said that multiples for large, strong-performing players in the industry are currently around 6 to 8 times EBITDA, in line with historical averages.

Small companies generally attract a lower multiple, anywhere from 4 to 6 times EBITDA, because they have not “achieved economies of scale due to reliance principally on either a local client base or one individual that typically owns the business,” said Lamm.

Kaulkin Ginsberg also believes that healthcare ARM firms will continue to get hard looks from potential buyers, on both the industry and private equity side.