Current Market Conditions and the Next Wave of M&A, Collection Agency Mergers

Predicting trends in M&A is almost like trying to determine whether my Philadelphia Eagles will play well with their new quarterback at the helm! It is a wild card, you just don’t know who will come out to play, kind of like watching McNabb for all of those years…enough on sports, let’s talk M&A.

Current Market Conditions

M&A in the debt collection industry is active right now; we just came off a strong quarter which produced 11 deals and $550M in total deal value. We had closings across a variety of sectors from financial to healthcare to telecomm with most of the M&A activity being driven by industry players — agencies acquiring other agencies. We are starting to see more interest from financial and strategic buyers who are actively seeking platform companies but they remain cautious, trying to understand if this is an optimal time for them to buy into this industry, addressing key concerns including:

• Job creation and unemployment – Unemployment is at 9.5%, Where/when will these folks find jobs? Extension of unemployment benefits will not last forever and then what?!

• The regulatory environment – It is not “if” but when the FTC re-writes FDCPA, what will that mean to the industry? What will the new Consumer Protection Agency have in store for the industry? Will they eliminate out-of-statute collections altogether?

• Market segment changes – With the reduction of loan originations, agency networks are being reduced and credit grantors are bringing back internal first party projects. Changes are also anticipated as a result of healthcare and student lending reform.

Buyers are evaluating the market and seeking the right “platform” companies to invest into or acquire completely. Industry buyers continue to be active, hunting for good add-ons that will expand their capabilities and suite of services, like we saw that with the recent acquisition by Chris Wunder of ROI Companies of ARC Group Associates.

The Next M&A Wave, Agency Mergers?

M&A comes in waves. The last one started in 2004 and crashed in 2007 with the start of the recession and resulting credit crunch. We believe the next wave, which is starting now, is going to be shorter and will include small and mid-size ARM firms ($5-$50M in annual net fee revenue) merging together to create a more competitive and dynamic regional or national player. Last week, I had a call with a healthcare agency on the East Coast with approximately $5M in revenue. They were going after business in the Mid West and couldn’t win the bid because they didn’t have an office near the hospital or the compliance measures like PCI in place. It got the owners thinking: why continue to “fight the fight,” trying to grow into new markets if they weren’t prepared to make the proper investments to get there? Ultimately they made a group decision to locate a similar sized agency in that market to merge with. They ended up finding a merger partner. They needed facilities in certain parts of the country to win business along with certifications/client compliance requirements in place, and the merger partner obtained additional clients, management and sales expertise along with an East Coast presence. They structured the merger so that a couple of the owners on both sides were able to retire, receive some cash proceeds over a multi-year period of time and maintain a small equity position in the combined entity. A win-win if you ask me.

These types of “merger” conversations are happening more frequently, where executives are doing their own SWOT analysis on how competitive they can truly be as a “stand alone” platform in this industry. Let’s face it, creating a defensible, competitive advantage may require you to think differently about whether you can make it on your own as this industry evolves and the regulatory environment gets tougher.

So, what do you think? Are the Eagles going to have a good season? What do you think will drive M&A activity? Do you think we will see more mergers between collection agencies? Your thoughts are welcome. Feel free to email or call me.

Michael D. Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg’s Strategic Advisory team. Michael can be reached directly at 240-499-3808 or by email. You can also read his blogs, follow him on Twitter, or network with Michael from his social media page on insideARM.com.