Mergers and Acquisitions in the ARM Industry Surprisingly Active

There were more announced transactions in the first half of this year than there were at this point last year in the accounts receivable management industry (ARM), but the economy has definitely had an impact on total deal value. As the first half of the year came to a close, there were 21 announced transactions with a total deal value of $103 million – compared with 15 deals valued at $1.43 billion at the same point last year.

A large part of the discrepancy in deal value is due to three large transactions that closed in the first half of 2008 which added up to roughly $1.2 billion; NCO Group’s acquisition of Outsourcing Solutions, Inc.; Investor AB’s 50 percent purchase of Lindorff Group; and Exponent Private Equity LLP’s acquisition of Lowell Holdings Limited.

Larger transactions this year have been hampered by the credit crunch and economic recession, and these conditions have caused a shift in deal terms and structure as well. Many deals are dependent on the buyer’s ability to obtain debt financing – which has been difficult in the current market. In addition, liquidation rates have declined in all market segments over the past year, impacting the financial performance of some ARM companies, and thus affecting deal value and/or terms. In some cases, this has caused sellers to assess whether they can accept some form of deal structure in order to bridge the gap between their value expectations and those of the buyer in order to close a deal.

Despite the market challenges, we’re seeing a consistent level of seller and buyer interest – especially from industry buyers. So far this year, 19 of the 21 transactions have involved large ARM companies, former owners, or current/former industry executives buying up smaller ARM companies.

Distressed situations have increased, and that is driving some buyer interest. Industry buyers with strong balance sheets are looking to acquire distressed ARM companies, as they present good opportunities for obtaining new clients or personnel, gaining a time zone, or expanding into new vertical markets. Some strategic and financial buyers are looking at distressed situations for opportunities as well. Distressed company transactions generally involve little to no cash at closing, and structure involving earn-outs and retained equity is common.

Looking ahead to the rest of 2009, we anticipate that most deals will involve industry buyers, as first-time strategic and financial buyers are going to be even more selective and take longer to close deals. We do expect a slight up tick in strategic and financial deals closing in fourth quarter, because sellers already in the market will be motivated to close before the end of the year to avoid the potential increase in capital gains tax.

For more detailed insight into the M&A market and the aspects of distressed company sales, please join us at our Executive Conference Call, “ARM Industry Mid-Year Update: Intelligence for Navigating a Turbulent Market,” Wednesday, July 22 at 1pm EDT. Visit www.insidearm.com/go/executive-conference-calls/arm-mid-year-update for more information.

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.