By Corporate Advisory Solutions
Tuesday, March 10th, 2015
The Accounts Receivable Management (ARM) industry produced a record breaking year in merger and acquisition (M&A) activity in 2014, as 23 deals were consummated generating more than $3.35 billion in total deal value, eclipsing the previous record set in 2006 by just over $50 million. Like 2006, 2014’s results were driven by large platform acquisitions, particularly in the European debt purchasing market. Most notable were the transactions involving Portfolio Recovery Associate’s (NASDAQ: PRAA) acquisition of Aktiv Kapital (Norway), and Encore Capital Group’s (NASDAQ: ECPG) acquisitions of Marlin Financial Group (UK), Cabot Financial (UK), and Janus Holdings (Luxembourg). The sum of these transactions represented over half of the total deal value for the year. Both PRA and Encore have been aggressively pursuing acquisitions domestically and abroad over the past three years, motivated to develop new growth opportunities.
While certain landmark deals were accomplished in 2014, the majority of deals completed in the ARM industry in 2014 were consolidation plays – larger industry players acquiring smaller ARM companies, and well performing businesses absorbing turnaround and/or distressed situations. Small and mid-sized ARM companies have become challenged in the consumer markets to sustain their business performance as large creditors continue to consolidate their vendor networks, and regulatory authorities continue to raise the compliance bar for the ARM industry. For many, it has become too costly to service clients in certain sectors, particularly financial services. Creditors in this and other consumer sectors are cutting down their vendor networks to those who meet their compliance standards and are capable of handling larger volumes of business in multiple asset classes. This has created an increase in M&A interest between those companies with attractive clients but an inability to service them profitably, and those who are well capitalized and trying to gain access to new client relationships. One example of this trend occurred in Q2 of 2014, when Integrity Solution Services (ISS) was acquired by Oakville Consolidated Limited and ultimately merged into Radius Global Solutions. ISS had lost some important clients, causing their performance to decline and ultimately motivate the owners to pursue an exit strategy. This has been a very common theme over the past four years.
From a regulatory perspective, buyers have been most concerned about outstanding TCPA lawsuits. With a four year look-back, ARM companies with outstanding TCPA cases have been required in many instances to accept more structure than would typically exist, and indemnify buyers for any potential issues that arise in the future for a period of time from these lawsuits. FDCPA suits are less of a concern as the cost per suit is smaller and therefore the potential liability is less significant.
Still, there are several growing niche markets with strong industry specialists that are generating considerable interest and attention, particularly from strategic buyers. In addition to having attractive clients, these companies also tend to have a strong operating platform, extensive market experience, proprietary historical portfolio liquidation data, and experienced management in place.
We are bullish about M&A activity in 2015 as these trends continue to unfold and new money is finding its way into the ARM market. Buyers remain cautious in their approach to deals, but with more money available and limited purchasing options, companies with attractive assets under management and/or strong operational platforms that support blue chip clients continue to generate interest and demand in today’s market.
Prior to the credit crisis, banks were setting record profits from consumer lending, with the majority of that financing going to the mortgage space. Any borrower with moderate to good credit was able to receive a loan. Following the mortgage bubble, credit markets were extremely tight and it was very difficult for the average consumer to receive financing. Banks were more selective in their lending criteria and focused primarily on corporate lending. As a result the Fed cut benchmark rates close to zero in an attempt to spur economic growth. Post the credit crisis, bank lending numbers have been improving, but still are not close to the levels prior to 2008. In 2014, the top 5 banks reported an increase of 7% in corporate lending but saw a significant drop in consumer lending. Due to tighter lending restrictions, consumers started to save more and slowly pay off their debts. The average consumer credit card debt has decreased approximately $3,300 over the last five years.
2015 ARM Forecast
The ARM sector will continue to be dominated by smaller middle market activity in 2015. Companies ranging from under $10 million in revenue to approximately $50 million in revenue will be the most attractive for buyers. As credit terms remain favorable and general macroeconomic trends continue to trend upward, we will see an influx of buyers and sellers in the marketplace. Buyers are in search of the “right fit” in a potential acquisition. They are willing to pay a premium for targets that meet their selection criteria.
Markets of focus in the ARM space for this upcoming year include student loans, healthcare, and auto. Student loan debt has eclipsed $1.1 trillion and approximately 33% of them are delinquent in some capacity. Healthcare market revenues have been on the rise since 2004 and are expected to generate approximately $1 trillion of revenue in 2015. A year-end report published by the TransUnion Credit Bureau expects vehicle loan delinquency rates to increase 1.27% in Q1 of 2015, which is up from 1.20% at the end of 2014. There will be plenty of opportunities in these three sub-sectors as companies will look to outsource their collection efforts in order to receive their delinquent receivables.
ARM Regulatory Compliance
Regulatory compliance has become one of the biggest areas of scrutiny for potential buyers. Over the last few years, firms in the ARM space have increased their diligence efforts to ensure their targets have a sufficient Compliance Management System (CMS) in place. Some specific areas buyers are looking to evaluate are:
- ¥ Prior and pending legal action against the company-particularly TCPA cases
- ¥ Agent training and then re-raining following violations
- ¥ Documentation of policies/procedures
- ¥ The process of handling, evaluating, and remediating complaints
Targets with an adequate CMS system in place are being brought to the forefront. This is one less area buyers have to worry about post acquisition. If you are considering a sale in the near-term, take the time to get your “compliance house in order.”