Are the Big ARM Boys Shifting Strategic Focus? Yes, But...

Mike Ginsberg

In the past 18 months, the two largest collection agencies were involved in meaningful M&A transactions that significantly impacted their business and raised a few eyebrows among agencies and investors alike.  Why did these transactions take place?  Are the owners trying to get out of collections?  What is the end game?

The first transaction was the sale of iQor, estimated to be the second largest ARM company in the U.S., to private equity firm Huntsman Gay.  Before the ink dried on that transaction, the company announced the acquisition of RMS, the largest ARM company focused on commercial collections.  Then, less than a week ago, One Equity Partners, the owner of NCO Group, announced the acquisition of APAC Customer Services in a deal valued at $470 million.

While these are significant transactions on their own accord, they also represent a growing trend among large and mid-size collection agencies.  Both iQor and NCO are clearly positioning themselves as BPO companies rather than ARM companies.  Are they doing this because they don’t believe that collections and receivables management are growth sectors?  Absolutely not.  Instead, as private equity-owned companies, they have at least one eye on the prize at all times.  The exit prize.  And I am sure they believe the biggest payday for their investors will come through a public share offering and not a sale to a strategic or financial buyer.

Do the math yourself.  If they sell in today’s market, with the scarcity of debt financing, they won’t get anywhere near as high a multiple as they would get if they were to successfully take their company public.

Next question: How many publicly traded debt collection agencies are there?  Answer: none.  Encore Capital Group, Portfolio Recovery Associates and the other public companies in the ARM sector are not debt collection agencies.  They are debt buyers and not solely focused service providers with clients like NCO and iQor.

The value placed on a BPO company in today’s public market is far greater than the value that would be placed on a debt collection agency simply because there are more BPO companies and it is easier to find market comparables.  Therefore it is easier for an investor to understand the growth opportunities and risks involved with a BPO company compared to an ARM company.  Institutional investors are simple-minded and tend to want to invest in sectors they know and understand.  Simply stated, ARM does not offer as clear a picture as BPO because of the number of public players.

Other large and mid-size players that are not necessarily influenced by private equity capital or positioning for a public offering are focused more on growth than exit.  Many see BPO (and CRM) as complimentary and therefore growth areas for their own business.  I think it is prudent to offer additional services to clients, provided it does not negatively impact the ARM services and confuse the client.  This is not new but we are seeing more of it in today’s market.

What are you seeing in the market?  Comment below or give me a call.  Or, let’s connect if you’re attending the ACA convention this week.  I will be speaking about this and other topics on Thursday morning.

Mike Ginsberg is President and CEO of ARM advisory firm Kaulkin Ginsberg, and can be reached by email. The firm is celebrating its 20-year anniversary in the ARM market.