Shifting Landscape in Mergers and Corporate Divestitures a Sign of the Times

Last week, a merger was announced between two accounts receivable management firms ("North Carolina Collection Companies Merge to Create Stronger Regional Source," April 22).  I believe this is indicative of the times for two reasons.  

First, I strongly believe that over the next 12-24 months, numerous collection agencies, debt buyers, and vendors that are severely impacted by the recession will be forced to merge their operations to cut costs.  Others will merge for defensive purposes as they are experiencing a lack of financing to operate their business or purchase debt, or decreased revenues driven by lower recoveries in a down economy.  

In these mergers, little or no cash will change hands.  Deal structures will include seller financing, earn-outs based upon achieving defined profitability or revenue levels, and/or equity in the surviving entity.  

It is important to note that there is still a market for ARM companies that are well-capitalized, operating profitably, and growing.  I am addressing the increasing number of underperformers that will more likely be absorbed by larger, better capitalized companies through mergers.  

Second, I expect we will see an increase in the number of corporate divestitures of “captive” collection and/or call center operations that are owned by healthcare providers, utilities, banks, and other credit grantors.  When companies see a drop in their captive’s recoveries, the decision makers may opt to improve performance and be paid cash by divesting their non-core collection or call center operations, selling them to stand-alone businesses that specialize in providing these services.  

If you own or run an underperforming business, you have choices. You can take a wait-and-see approach, hoping that things won’t get much worse.  You may be able to work through the recession by cutting costs, firing unprofitable clients, and securing financing on your own.  Or, consider joining forces with a larger player that is well positioned to survive.