M&A Activity in the Accounts Receivable Management Industry: Early Signs 2010 Will Be a Stronger Year

2009 was a challenging year for mergers and acquisitions in the accounts receivable management industry. We estimate the overall deal value for transactions was $425 million – far less than the $2 billion in deal value recorded in 2008.

Despite the decline in deal value, there is positive news about last year’s activity and there are some encouraging signs for the year ahead. Although there was a huge difference in deal value, the volume of transactions remained essentially the same; 36 deals closed in 2008 and 35 in 2009.

A majority of these transactions (80 percent) involved larger agencies acquiring smaller ones, or former executives getting back into the space via acquisition. These industry transactions continued to close at a steady pace despite the recession – primarily because the buyers knew what they were buying and could readily finance the transactions.

Larger platform acquisitions and management buyouts did occur, and seven of these types of transactions closed last year. These larger-size transactions continued to experience a reduction in valuation multiples, however. Financial buyers historically drove up the valuations of these larger companies, but starting in the second half of 2008 their valuations declined due to lack of available debt financing and increased uncertainty regarding future financial performance. Financial buyers frequently required sellers to accept more deal structure in the form of earn outs, sellers’ notes and/or retained equity to share in the deal risk.

The number of transactions that involved some form of deal structure increased in 2009, but the good news is that there were also all-cash transactions – mostly involving companies that outperformed the market, offered buyers substantial growth potential, or were valued appropriately for this deal structure.

Another byproduct of the economy was longer engagement periods for M&A transactions. Buyers took more time to complete their due diligence and placed greater scrutiny on the seller’s financial performance, legal activity, and client growth opportunities. This caused some deals not to close as sellers changed their value expectations or buyers became uncomfortable with the results of their due diligence. The most prominent example of this was the announcement by NCO Group in early December to terminate its interest in acquiring Axiant, LLC.

Toward the end of last year, we began to see certain trends unfolding that may indicate M&A activity is on the rise. One sign is that more than half of the total deal value in 2009 – an estimated $229 million – was achieved in Q4. As the credit markets continue to loosen, the number of large and mid-sized transactions should increase in 2010.

Also, some of the deals that would have closed in 2009 under ordinary economic conditions were put on hold by the sellers as a result of lower acquisition multiples and/or company performance. Some of these transactions are likely to re-emerge this year, which could mean stronger deal value and volume results for 2010. Add to this trend the effects of an improving economy and 2010 should turn out to be a stronger M&A year.

Mark Russell and other Kaulkin Ginsberg advisors will discuss the M&A market for ARM in detail on February 16 during a webinar at EXPO 3.0. “ARM M&A Activity Update” is open to all registered attendees of EXPO 3.0, and admission is free. Register today!

Mark Russell manages M&A transactions for Kaulkin Ginsberg. To confidentially discuss your business interests, please contact Mark Russell at 240-499-3804, or by email.