Credit Crunch Impact on ARM M&A

I am often asked by business owners and investors what impact the credit crunch is having on M&A in the ARM industry. My answer depends upon who is asking the question. Here’s why.

Most private businesses involved in the ARM industry (i.e., collection agencies, debt buyers, collection law firms and vendors to those companies) are not of a size that would be impacted by a shortage of financing if they were to be sold. The vast majority of these businesses are well under $50 million in annual fees or revenues. As a result, the buyers of these businesses tend to be larger collection agencies and established businesses from closely related industries.

These types of buyers are not going to fail to close a transaction because they cannot secure financing in the wake of the eroding sub prime housing market. If they are qualified buyers (financially) then they should have pre-existing relationships with cash flow lenders and they should be able to secure financing based upon the merits of the combined operations. Any buyer of a business with a price tag under $50 million who uses the excuse that they could not secure funding because of the collapse of the subprime market is not well connected to cash flow lenders in the first place. There is a long list of reasons why a buyer may not close a transaction but this should not be one of them.

For owners of ARM businesses who have built operations with annual revenues in excess of $50 million, the M&A marketplace is vastly different. Most buyers come from outside the industry and include related industry buyers (i.e. CRM and BPO) and private equity firms. Buyers from related industries, for the most part, have financing alternatives already in place including public stock and established lines of credit. Private equity firms have been successful in recent years in accessing cheap debt to fund deals and returning lots of money to their limited partners. For some transactions they have borrowed heavily and financed their deals with junk bonds and, as a result, have leveraged transactions at very high levels. The changing landscape of the credit market has made it more difficult for these highly leveraged multi-hundred million and billion dollar buyouts to occur. Buyout firms are being forced to pay higher borrowing rates and put more of their own money into the deal because prices have yet to come down.

For those of us who have been around M&A long enough to remember, this is not the first time that businesses were challenged by the threat of deteriorating credit markets. Remember the recession of the 1990s when savings and loan banks across the country collapsed under the weight of bad real estate loans? Even well-established businesses couldn’t secure financing for expansion back then. So far, there’s no sign whatsoever that financing is vanishing as it did in the ’90s. Some buyers may be forced to pay higher interest rates than a few months ago, but they are still lining up to do deals and financing remains widely available for buyers that know where to go for it.