Interest in Collection Agencies Soaring

Merger and acquisition activity among collection agencies has certainly picked up in 2004. I’m sure many of you have been reading the headlines on CollectionIndustry.com and have noticed just that. And while increased deal volume is certainly interesting, it’s the type of deals that have taken place recently that really grabs attention.

Generally when you hear of a merger or acquisition in this industry, or any industry for that matter, it is a deal where a larger collection agency purchases a smaller collection agency and absorbs it into its operations. There have been plenty of those. But the real interesting stuff involves companies in seemingly unrelated fields purchasing collections operations.

For example, the Sallie Mae acquisition of Niles, IL-based Arrow Financial Services last month stands out. Actually, Sallie Mae bought a majority interest in Arrow with the option to acquire the remaining interest in Arrow over the next three years – semantics. But it was no small acquisition. Arrow Financial Services is a debt purchaser and contingency collection agency that employees more than 1,400 people in offices across the U.S. In fact, when you factor in Sallie Mae’s acquisitions of Pioneer Credit Recovery and General Revenue Corporation in early 2002, the student loan provider has positioned itself as one of the largest collection agencies in the country. It would be easy to assume that Sallie Mae intends to fold the operations of Arrow into its existing collections operations. But according to the deal announcement, Arrow will retain its brand image and management.

Another interesting, and large, deal was announced in July between West Corporation and Worldwide Asset Management, another debt purchaser/contingency agency. This one is not quite as eye opening as the Sallie Mae deal, as West was already a leading provider of outsourced communication solutions. But yet again, with previous acquisitions, West Corporation is also now positioned as one of the largest collection agencies in the country. According to the purchase announcement, the total price West paid for Worldwide was $178 million.

While the Sallie Mae and West deals were merely continuations of an acquisition strategy involving collection agencies, another publicly traded giant announced it was entering the collection industry in April. Convergys, a global leader in integrated billing, employee care, and customer care services, purchased Encore Receivable Management, Inc. (not to be confused with debt purchaser Encore Capital Group, Inc.) for $68 million. Encore is primarily a contingency collection agency focusing on bankcard collections. It was a perfect fit for Convergys whose clients include many credit card issuing banks. With Encore, the company can now add collections to its suite of business process outsourcing (BPO) offerings.

The expansion of BPO services is a running theme in many non-traditional acquisitions in the industry this year. As large BPO’s look to offer their clients more services, they are increasingly turning to accounts receivable management and collections as a viable option. In fact, one of the more interesting deals of the year came about as a result of that thinking.

Just last week, Indian BPO firm ICICI OneSource announced the purchase of New York-based Account Solutions Group, LLC (ASG). That’s right, and Indian firm buying an American firm. And ICICI OneSource is no small operation: it’s the BPO and contact center arm of Indian banking giant ICICI Group. The firm was looking to add collections as an option to its clients, so it went out and got an American agency – a pretty big one at that; ASG has about 500 employees and 2003 revenues of over $25 million. ICICI OneSource also said it will keep ASG’s management team in place and vowed that not one American job would be lost; in fact it wants to expand its team in Western New York. An Indian firm creating jobs in the U.S. – go figure.

But the ICICI/ASG deal was not the first major acquisition of a U.S. collection agency by a foreign firm in 2004. Back in late March, British BPO firm Vertex, a subsidiary of United Utilities PLC, announced the purchase of Denver-based First Revenue Assurance, a collection agency focused on telecom, retail and banking collections. Again, the deal was a perfect BPO fit: Vertex recently launched a North American customer management and outsourcing subsidiary focused on the utility and energy sectors. Now, it can offer collections. This was also a substantial deal, with First Revenue posting revenues of around $12 million in 2003 with 200 employees.

So what does it all mean? Collection agencies and debt purchasers have been hot on Wall Street for a couple of years now. We now see that they are becoming popular among acquisition strategists, especially those focused on the BPO industry. There is also a running theme among the collection agencies being acquired: they’re all great companies with great management that play by the rules. So maybe that’s the greatest lesson in all of this.

Patrick Lunsford is the Content Manager and Editor of insideARM.com. He can be reached at patrick@insidearm.com.