NCO-OSI Deal Signed, Now it has to Get Done

As soon as the ink dried on the agreement that will send Outsourcing Solutions, Inc. (OSI) to the NCO Group family for $325 million, the focus of top executives shifted to ensuring the deal is approved and closed by the end of the first quarter of next year.

The all-cash deal, announced yesterday (“NCO Group to Buy OSI for $325 Million,” Dec. 12), will combine the U.S.’s two largest collection agencies: Horsham, Pa.-based NCO Group and OSI, headquartered in St. Louis. But there is still a ways to go before the agreement is complete.

“A lot of things have to happen before this deal is done,” Brian Callahan, NCO’s vice president of financial reporting, told insideARM.com this morning.

For starters, government regulators must approve the deal which, while expected to not be a problem, could require scrutiny due to the size of the two firms and their combined market share. OSI shareholders will also have to give their blessing, a hurdle that is not as straight-forward as might be expected with a privately-held firm.

“We have over 200 shareholders,” said Kevin Keleghan, president and CEO of OSI. “Various hedge funds and private equity firms are left over from our 2003 restructuring. But they all are looking for value and so far the deal has been viewed very favorably on their part.”

Keleghan said that his focus for the next few months will be getting the deal done. After that, he said that he will do anything he could to help successfully integrate the two giants. But Keleghan conceded that his run with the company would likely soon end.

“I think after the deal is done, and an integration plan is in place, my job is done here and it will be on to the next mission,” Keleghan said, adding that he is not currently looking at other opportunities.

The combined company will employ some 29,000 people in about 140 offices in ten different countries. Both companies have been clear leaders — even dominate players — in the debt collection industry for years. And both have also recently expanded their offerings to include more business process outsourcing services.

To some observers, the commonality of the two firms could present several roadblocks to completing the deal. For one, deciding what operations to keep and what to jettison could mean headaches. Secondly, regulators could decide the combination of the two giants in the field presents antitrust problems.

But Keleghan noted that each company has its own focus, so fitting together the pieces may not be the Herculean task some might consider it to be. “The two companies are much more complimentary than most people think,” he said.

For example, said NCO’s Callahan, NCO counts traditional third-party contingency collection work as one of its largest business lines, while OSI’s first-party business is a huge contributor to its top and bottom lines. Also, the two firms’ debt purchasing units have been active in different markets, buying portfolios from completely different debt segments and at different stages in maturity.

This should help in the government approval process, said Callahan. “There’s just not as much overlap as is probably perceived,” he said.

When government regulators look at the deal, they will have to consider that the combined company will not dominate a business sector that both have been expanding into over the past few years: business process outsourcing services.

“While the new NCO will clearly be the largest ARM company in the world, it will be competing against much larger firms for BPO contracts,” said Mike Ginsberg, CEO of M&A advisory firm Kaulkin Ginsberg. “Also, you have to consider that the combined company will still make up only a small fraction of the overall ARM industry.”