Now that NCO Acquired OSI, Who?s Next?

For anyone who has followed NCO over the past 15 years, it comes as no surprise that they were able to close and fund the OSI acquisition.  I can’t recall a transaction that Mike Barrist and his team announced that they were not able to close and fund.  Since then, I’ve been asked the same two questions repeatedly: “Are deals still getting done in the ARM industry?” and “Who’s next”?

M&A transactions continue to get done in the ARM industry in spite of the tough lending environment.  While cheap debt is harder to come by, it is the billion dollar plus leverage buy-out transactions that are consistently falling apart, not the deals in the lower to middle-market range (Less than $250 million in value).  Let me remind everyone that the vast majority of ARM transactions fall into this lower to middle range of the market.  

Yes, some transactions are being priced lower or structured differently so the risk is shared between the buyer and the seller.  Reductions in purchase price or changes in deal terms are occurring for two primary reasons.  Either the seller experienced a major performance change, such as a loss of a major client that forced the buyer to reconsider their initial proposal, or the buyer is not able to secure financing from its lenders.  If the buyer is a public company, their stock price may have slipped to a point where the price is no longer accretive.

I believe the majority of ARM M&A transactions over the next 12-24 months will involve sellers that fall into one of the following categories:

Large Independents – We define a large independent as a company that is at the top of  its particular market segment and is not a division of a larger company or majority owned by a private equity firm.  By definition, large independents are specialists and not generalists.  They are relatively large by ARM standards, generating revenues of $20 million or more a year.  Private equity firms and corporate buyers from outside the industry are still attracted to these players because they are profitable, have significant growth potential, and typically employ a strong executive team that can lead the company post sale.  Due to the limited number of these opportunities, coupled with certain competitive advantages that they enjoy as successful market leaders, we anticipate these companies to continue to generate substantial buyer attention, resulting in premium values in today’s marketplace.

Healthcare ARM – This sector has already generated a relatively large number of M&A transactions involving small to mid-size healthcare ARM companies, and we expect this trend to continue as buyers in this market segment seek to expand their footprint geographically.

Debt Buyers – A consolidation is inevitable in the U.S. debt purchase industry and this will drive a considerable amount of M&A activity over the next 12-24 months.  The time for the debt buying industry to consolidate is now.  Let’s face facts.  Some debt buyers purchased portfolios over the past few years at high prices and now they are struggling to generate expected returns. They can only stretch out their curves so far before they are forced to sell.  A larger, well funded debt buyer is a logical acquirer of these businesses.

Also, large credit card issuers still control over 80% of debt sold in the market.  These issuers want to work with large, well capitalized and reputable debt buyers.  They are willing to sacrifice on price if they feel the debt buyer is able to protect their image in the market.  Issuers will force a consolidation through their actions  – selling their debt to established buyers that demonstrate rock-solid credentials.

So what are you seeing in the world of mergers and acquisitions in the ARM industry?  Do tell.