Q3 2001 M&A Activity in the Outsourced Business Services Sector

This article appears in the recently published Kaulkin Ginsberg Company Fall 2001 Bulletin.

The Outsourced Business Services Sector includes cash flow-oriented enterprises that offer professional, third party services to the public or private sector. This article summarizes M&A deals that involve middle market companies in the following industries:

* Debt Collection
* Debt Purchasing
* Credit Reporting
* Call Center Management/Telemarketing
* Direct Marketing/Fulfillment
* Billing
* Staffing

Overall, there was a significant decline in M&A activity across most industries during the 3rd quarter. This was due primarily to a combination of a declining global economy and the impact of the tragic events of September 11th, which according to an article posted by www.TheDeal.com caused 20 significant deals to be canceled worldwide and even more to be delayed or renegotiated.

In the outsourced business services industry sector, we also noticed a decline in the number of total deals completed as compared to the same period last year. However, even with an increasingly tough lender market and impending recession, this quarter has proven that buyers and sellers who developed the right strategic M&A plan were still successful at getting deals done.

Debt Collection
Eight notable transactions occurred during the 3rd quarter. The 3rd quarter began with Perot Systems Corp. (NYSE:PER) acquiring Advanced Receivables Strategy (ARS), a sizeable player that is recognized as one of the largest providers of on-site accelerated recovery services in the United States. ARS is headquartered in Nashville, Tennessee, and also supports regional offices in Boston, Chicago, Dallas, Ft. Lauderdale, Houston, Los Angeles, and Seattle. ARS’s Government Accounts Division, which provides Medicare/Medicaid consulting, is based in Atlanta. With a total deal value of $102.4 million, this deal represented one of the largest acquisitions that involved a debt collection agency this year. Hot on its trail was a second notable transaction involving the acquisition of Recovery Bureau of America (RBA) by Allied Global Holdings. RBA, with offices in Valencia, CA and Atlanta, GA, provides debt collection services to the largest banks in the U.S., and recently won a contract from the US Department of Education (DOE) to collect its delinquent student loan debt. This transaction represents the first acquisition of a U.S. collection agency by a Canadian-based firm, and clearly reflects the value that international companies see in U.S. based agencies.

It seems that Collection House Limited (AX:CHL) and the other Australian debt collection companies will be bracing themselves for some stiff competition due to the announced merger of two giant debt collection companies, Baycorp Holdings, Ltd. (NZ:BCH) and (AX:BAY) and Data Advantage (AX:DAD) in August. The new company, Baycorp Advantage (BA), will have a combined market capitalization of over US$1 billion and will produce roughly US$144 million in annual fees. This merger involves two companies with complementary geographic concentrations, diversified client bases and a similar growth strategy to expand into Asian territories. The merger is expected to reduce total expenses by roughly US$10-15 million, and produce one of the largest debt collection companies in Australia and New Zealand.

Perhaps the largest transaction to involve a debt collection operation occurred when one of Gerling Credit’s subsidiaries, Gerling Credit Insurance Group, acquired NCM Group, an Amsterdam-based credit insurance company with 1,800 employees in 30 offices worldwide, including an international debt collection agency subsidiary. Gerling Credit employs over 12,500 employees in offices located in 36 different countries. The new entity, Gerling NCM, will be the largest credit insurer in the world, maintaining a 25% stake in the world credit insurance market. It will also maintain its commercial debt collection business, which produced roughly $23 million in annual fees in 2001 fiscal year.

Another noteworthy transaction involved Dun & Bradstreet divesting its Australian accounts receivable management division, Dun & Bradstreet Australia. The local management team purchased the business and the new name will be D&B Australasia Pty Ltd, of which Dun & Bradstreet will retain a 2.5% equity stake. Dun & Bradstreet had previously spun off its U.S. and European divisions back in the first quarter of 2001.

A new strategic buyer also came on the scene this past quarter. FirstPoint, Inc., a Greensboro, NC company with a debt collection subsidiary (DK Fulk & Associates), expanded its debt collection client base and geographic scope by acquiring Piedmont Credit & Collections of Charlotte, NC.

Debt Purchasing
Collection House Limited (AX:CHL) of Australia continued its shopping spree this quarter by purchasing over $400 million in debt portfolios. This brings the total debt purchased during the past 18 months to over $920 million. According to press releases provided by CHL, roughly 15-20% of annual fees are generated from their debt ledgers. In addition to purchasing these debt ledgers, CHL also acquired four companies earlier this year. Typically, the market negatively impacts a company’s share price during an aggressive acquisition campaign because it anticipates a period of time needed to integrate the new businesses and achieve positive earnings. However, over the past twelve months since CHL first floated their shares into the Australian Stock Exchange on October 4, 2000, its share price has increased 330% from $1 to $4.30 as of October 16, 2001. This clearly proves that even in tough times, collection agencies can effectively implement strategic M&A plans.

Call Center Management/Telemarketing
According to the Outsourcing Institute, 29% of all companies that produce $10 million or more in annual revenues are outsourcing at least some of their non-core activities, with customer service and support ranking high on their list of outsourcing needs. Based on discussions with several of the industry leaders, it seems that the September 11th attack has caused many prospective clients to reevaluate their current disaster recovery plans and outsourcing needs. Based on this reaction and the rising costs of managing internal resources to handle customer interaction, it is perceived that the demand for outsourced customer solutions will significantly increase over the next few years.

Overall, there wasn’t much M&A activity in the call center industry this past quarter, but companies are clearly trying to position themselves for future growth. Take RMH Teleservices (NASDAQ:RMHT), who just completed raising an additional $23.4 million in equity, bringing their total capital raise this year to $33.4 million. RMH is trying to ensure that it has the capacity and technical capability to be a market leader in the new millennium. Another example is SITEL Corporation (NYSE:SWW), who announced in the 2nd quarter a restructuring program that would eliminate approximately 350 positions and 2,100 workstations. Clearly they are realizing the cost advantages of maintaining a balance between having sufficient capacity for growth and utilization of existing assets.

Similar to the collection industry, there were seven significant deals that occurred in the call center industry during the 3rd quarter. Call_Solutions.com, incorporated in August 2000 and headquartered in Waukesha, WI, acquired three companies in the 3rd quarter, doubling the total number for the year to six. This company has been on the move from the beginning, and now generates more than $90 million in annual revenues and employs 3,100 employees. Not bad for 15 months of business activity!

iCall Systems, Inc. (OTCBB:ICAS), headquartered in Singapore with U.S. operations in San Francisco, CA, made its first acquisition in the beginning of this quarter, 1st Call Pte Ltd. 1st Call is also based in Singapore and is a provider of outsourced, customer interaction in Asia.

Strategic Partnerships: Please review the section of this report that discusses the operational and cost benefits realized from developing an outsourced strategic partnership with an international call center. You might be amazed at how this type of opportunity could dramatically improve your top line and bottom line results. If you are interested in learning more about how you can benefit from this type of opportunity, please call Mark Russell at 301-907-0840 extension 120.

Billing
DataMax Corp., located in Winston-Salem, NC, acquired T.W. Consulting of Virginia Beach, VA, and created a new subsidiary called Medical Billing Solutions, LLC (MBS). MBS is a full-service medical business office outsourcing company.

Mark Russell is an Analyst at Kaulkin Ginsberg Company, a leading provider of sophisticated M&A advisory services to the specialized outsourced business services sector. If you would like to learn more about how Kaulkin Ginsberg can assist you in developing your strategic M&A plan, please contact Mark Russell at 301-907-0840 x120 or email Mark@Kaulkin.com