Mixed Results to Date for Mergers and Acquisitions in the Accounts Receivable Management Industry

Mergers and acquisitions in almost all industries have been impacted by the economic recession, and the accounts receivable management industry (ARM) is no exception. Although the number of transactions is comparable to prior years, the value is down substantially. There were 29 announced transactions with a total deal value of $190.3 million through the first three quarters of 2009 – compared with 29 deals valued at $1.8 billion at the same point last year.

Much of this dramatic reduction in deal value is attributed to two major factors; 1) the difficulty of buyers to obtain financing, and 2) reduced company valuations due to lower liquidation rates and uncertainty in the market regarding financial projections.

Lack of financing has hampered large deals from closing this year. By the first half of last year, three major transactions took place; NCO acquired OSI for US$325 million; Investor AB purchased 50 percent of Lindorff Group for US$558 million; and Lowell Holdings Limited was acquired by Exponent Private Equity for an estimated US$394 million.  By comparison, none of the closed transactions this year have exceeded $75 million in deal value.

During the peak years of M&A activity between ’05 and ’07, buyers were able to get as much as four to five times a seller’s earnings in debt financing. Today, they’re lucky to get two to three times this amount. This decline in lender financing has caused acquisition multiples to decline as well. Recent trends have ARM companies selling for roughly 4 to 6 times their adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), although exceptions to this range can exist. Going forward, with increased M&A activity and better access to financing, this multiple range may increase.

The financial performance of many ARM companies has been affected by a decline in liquidation rates over the past year and this has a subsequent impact on deal value and/or terms for many deals. Because of the high degree of uncertainty in the market regarding future performance, buyers have been less willing to pay a premium value in cash upfront.  In many cases, buyers are requiring the seller to accept lower prices, less cash, and/or some form of structure – earn outs, retained equity or a seller’s note – as part of a transaction in order for the sellers to share part of the risk and be motivated to help ensure a smooth transition post-transaction.

In spite of the recession, there has been steady interest from industry buyers looking to capitalize on the economic times by expanding through acquisition.  Almost all the deal activity for the year has been driven by larger ARM companies acquiring smaller ones.  Many of these deals have gone unpublicized, and have often involved sellers in distress.

Looking to the rest of the year, more deals may close in Q4 because sellers already in the market are motivated to complete their transactions before the potential change in capital gains tax takes effect.  However, total deal value in 2009 will most likely end up at around 10-15 percent of deal value generated in 2008.

The good news is the ARM industry has historically been one of the fastest sectors to recover from economic recessions. Well-managed ARM companies have been focused on maximizing their operational efficiencies, and as a result they will be poised for financial growth as the economy improves. This trend coupled with the expected return of lenders to financing M&A transactions will motivate more strategic and financial buyers to close transactions, as they have been sitting on the sidelines for the past year.

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.