A Look Back at 2003 From An Industry Expert

Not since the deal-making craze of the late 1990′s has the debt collection industry witnessed as many significant changes as those that transpired in ’03. From OSI’s emergence from bankruptcy protection, to the flurry of investor activity in the debt purchasing sector, to the executive changes that were made at some of the largest agencies, the events that shaped 2003 were dramatic. I will recap the year’s most significant events and look into emerging trends that will shape the industry in the years to come.

Major Moves Among Large Agencies
Let’s start right at the top with NCO Group (NASDAQ: NCOG) who was busy in ’03. The company opened the year by integrating The Revenue Maximization Group, a New York based healthcare collection agency acquired in late ’02. In August, NCO announced that it hired an EVP, Business Process Outsourcing (BPO). In November, the company agreed to acquire RMH Teleservices (formerly NASDAQ: RMHT) for $89 million in stock and an assumption of $27 million in debt (read more), a move underlying its efforts to become a global BPO service provider. If that wasn’t enough, last month NCO announced its acquisition of the outstanding shares of debt purchasing business NCO Portfolio Management (NASDAQ: NCPM)(read more). Prior to this deal, NCO Group owned approximately 63% of NCPM.

OSI had a busy ’03 too but for entirely different reasons than NCO. The company entered the year with a new CEO, Kevin Keleghan, to guide restructuring efforts, voluntarily filed Chapter 11 in May (read more) and emerged less than 7 months with a strong balance sheet and a $90 million credit facility from Merrill Lynch to purchase debt (read more). It is worth pointing out that contrary to the belief of many, OSI emerged from bankruptcy without having to sell one business entity. They will be a force in the marketplace with their strong financial position and hungry management team.

Another top 10 player, Nationwide Credit, went through a change of ownership in November 2002, and assembled a “dream team” of executives in 2003 (read more) starting with the addition of Anthony Marino as its President & CEO, formerly head of Sears’ collection and customer service operations (read more). Some of the other top 10 players were less vocal about their changes, which included a change at the CEO position of one player and the expansion into debt purchasing by another.

2003 M&A Review
Merger and acquisition (M&A) activity continues to thrive in the debt collection and accounts receivable management industry in spite of a tight lender market that took its toll on deals closing in other industries, a weak IPO market for most of 2003, and uncertain times internationally. As of January 15, 2004, we confirmed that 58 transactions were completed in 2003 (this number may change in the future as we receive additional information on completed transactions; updated results will be provided in future M&A bulletins), slightly lower than 2002′s deal volume of 63 transactions. However, 2003 generated more than $865 million worth of deal value, significantly higher than 2002′s total deal value of $790 million. 2003′s strong deal value performance was led by Concerto Software’s $145 million merger with Melita International, and closely followed by NCO Group’s $116 million acquisition of RMH Teleservices. Other major deals included MedAssist’s recapitalization by Roundtable Healthcare Partners, Ontario Corporation’s management led buy-out (read more), Creditor Interchange’s sale to two private equity firms (read more), NCO Group’s acquisition of the remaining portion of NCO Portfolio Management, and the roll-up acquisition campaigns conducted by Experian (10) and AllianceOne (3).

2004 started off with a bang when DCS announced its $167 million recapitalization by Parthenon Capital (read more), positioning itself for the changes in the government sector and expected IRS windfall. All indications are showing that there will be even more buying and selling in ’04.

Debt Buyers Continue to Attract Attention
Coming off a very active 2002 in which Portfolio Recovery Associates (NASDAQ: PRAA) completed a surprisingly successful IPO in November, and two major players (Arrow Financial and Asset Acceptance) took on private equity partners, many insiders expected that the debt buying industry would cool off in ’03. Looking back, we find that the reverse is true. Public stocks performed very well. Most private companies grew their top and bottom lines. Credit grantors, especially banks and credit card issues, remained highly motivated to sell their charged off accounts. New funding sources emerged with sights set on challenging existing players. And the year ended with Bear Stearns acquiring a substantial minority stake in debt buyer Cavalry Investments (read more). The biggest concern in the market is price increases for debt portfolios as a result of increased investment activity.

Worth noting, quite a few contingency agencies are now dabbling in the purchasing arena and their interest continues to grow. Armed with capital, deep-rooted relationships with creditors and data to support their pricing decisions, contingency agencies will become a force to reckon with in debt purchasing in the years to come.

Emerging Trends

Off-shoring
Sparked by potentially significant cost savings, labor shortages and the demands of some large credit grantors such as American Express and Capital One, many agencies are looking to “move offshore”. The offshore movement is not new in business or in the debt collection industry. Some agencies have already established channels into India, Jamaica and the Philippines through joint ventures, partnerships and by opening their own call centers. Historically, collection services moved offshore included primarily 1st party/customer care work and some other ancillary services like skip tracing. Today, there are several offshore players positioning themselves for 3rd party collection capabilities, and one or two are beginning to emerge as strong contenders.

CRM into ARM
Even before the implementation of the national “do not call” list (read more), some larger players in the Customer Relationship Management (CRM)/Call Center Management industry were migrating into the debt collection industry because of identical cost structures, overlapping client bases and complementary service offerings. Today, with the implementation of the “do not call” list in full effect, some sizeable CRM/Call Center businesses are mapping out their survival strategies which call for expansion into debt collection. West and Sitel have already established a presence in the debt collection industry and more are on the way. The reverse is also occurring, as NCO and other debt collection agencies are making their moves into CRM, including in-bound as well as out-bound services, through a combination of expansion and acquisition efforts.

Expiration of non-compete agreements
Many of the non-competes that were executed in the mid to late 1990s by the owners and senior level executives who sold their agencies to the consolidators are expiring. As this occurs, some are getting the itch to come back into the industry. This is good news for some agencies that will either hire from this talent pool or sell their agency to these experienced buyers. Others will view this as a threat because many of these executives became financially independent as a result of the sale of their business and are not just looking for jobs. Some will start their own agencies with the intention of tapping into clients and staff that were once theirs.

Years from now, we will look back on 2003 as a pivotal year in the evolution of the industry. You should be aware of these events so that you can factor them into your own decision making process.

A brief note on Mike Ginsberg:
Mike spearheads all of Kaulkin Ginsberg’s advisory business practices. He oversees a team of professionals that has completed over 100 M&A transactions ranging from minority sales to complete buyouts. He and the firm provide strategic advisory services to owners, executives and investors centered on growth and exit initiatives. Clients served include many middle market businesses as well as Fortune 500 companies such as GE Capital and Deluxe Corporation. Mike has been a keynote speaker at association meetings and conventions on industry issues such as “When is the right time to sell?” and “The reshaping of the collections industry.” He is a member of the board of the Institute of Merger and Acquisition Professionals (IMAP), a member of the Association for Corporate Growth (ACG), and a member of the American Collectors Association (ACA) and Debt Buyer Association (DBA). Mike also serves as an expert witness, and sits on the advisory boards of several industry associations and publications. More about Mike Ginsberg and Kaulkin Ginsberg Company can be found on www.kaulkin.com.