2004 Not Just Another Year in the Collection Industry

Some may reflect upon the events of 2004 in the Accounts Receivable Management (ARM) Industry and say that it was the same as many other years. The year brought its share of mergers and acquisitions, executive changes and outside influences. But having tracked the events of the industry for nearly 15 years, we know that to summarize 2004 as “just another year” would overlook the significance of the events that took place, some of which could have a dramatic impact on our industry:

Record year for deal value
55 transactions took place in the ARM industry in 2004, representing a record breaking $1.5 billion in deal value. This surpasses the days of heavy M&A activity in 1998 and 1999 that were fueled in large part by consolidators backed by private equity firms. Let’s take a closer look at some of the noteworthy M&A events of 2004 to understand their importance.

Debt purchasing M&A tops the charts in 2004
Nearly $500 million was spent on debt purchasing companies in 2004. To put this into perspective, all of the debt purchasing M&A transactions from prior years combined do not even come close to last year’s total. West Corp. (NASDAQ: WSTC) acquired Worldwide Asset Management for $178 million in August 2004 and in September 2004, Sallie Mae (NYSE: SLM) acquired a majority stake in Arrow Financial Services. These two significant transactions raised a lot of eyebrows among executives and investors because, for the first time in the history of the debt buying industry, 2 major players were sold in the same year. With a cheaper cost of capital, significant client relationships and vast infrastructures to leverage, West and Sallie Mae could dramatically influence the way that debt is sourced, priced and serviced.

Off Shore BPO firm purchases leading third party agency
For the first time, an India-based business process outsourcing (BPO) firm acquired a U.S. debt collection agency. In October 2004, ICICI OneSource, a customer service company owned by ICICI Group (NYSE: IBN) and headquartered in Mumbai, India, acquired Account Solutions Group, a third party collection agency based in western New York. To date, joint ventures and start-ups have been the preferred method among the larger agencies and BPO companies to develop offshore collection capabilities and most of these efforts were focused on first party collection services. We strongly believe that the ICICI OneSource purchase of ASG will not be an isolated event and that similar India BPO-U.S. ARM transactions will occur in 2005.

Financial buyers are also closing deals
In January 2004, Parthenon Capital, a private equity firm, led a $167 million recapitalization of Diversified Collection Services (DCS), a leader in government receivables, illustrating that financial buyers are still bullish on the ARM industry. Later in 2004, Parthenon Capital divested its ownership in Arrow Financial Services to Sallie Mae.

Financial buyers are still aggressively seeking the right companies to purchase to serve as a platform in the ARM industry. Typical financial buyers will pay competitive multiples for companies that fit their size requirements, have strong senior level management in place, and demonstrate consistent top line and bottom line growth.

CRM and ARM continue to converge
Further illustrating the interest that top Customer Relationship Management (CRM) companies have in the ARM industry, two significant acquisitions were announced in 2004. Convergys (NYSE:CVG), a global leader in integrated billing, employee care and customer care services, acquired Encore Receivable Management in May 2004 for up to $68 million. Also in May, Vertex Customer Management, a subsidiary of U.K.-based United Utilities PLC (NYSE: UU) acquired First Revenue Assurance (FRA), a Denver-based collection agency servicing the utility and financial sectors. Terms of this transaction were not announced. These transactions reflect the emphasis that CRM companies are putting on the cross sell opportunities, capacity utilization benefits and profitability of ARM companies.

Public debt buyers outperform S&P 500
In 2004, the stock performance of publicly traded debt buyers vastly outperformed the S&P 500, which grew a healthy 9 percent. Asset Acceptance (NASDAQ: AACC) increased 17% since its February 2004 IPO, while Portfolio Recovery (NASDAQ: PRAA), Encore (NASDAQ: ECPG) and Asta Funding (NASDAQ: ASFI) each increased more than 55%! As is widely acknowledged, it has become more challenging for debt buyers to source portfolios at reasonable prices in the U.S. bankcard/credit card market due to increased competition; so buyers are actively looking into other industries and internationally for purchasing opportunities. As a result, specialists in the healthcare, telecommunications, international and other emerging markets have become prime acquisition targets.

Executive changes worth noting
2004 might go down in the industry archives as the year of the executive change as a large number of executives found new homes. Executive changes were most apparent among the consolidators formed in the late 1990s for which five new CEO level positions were filled last year. Since all executive changes are significant in nature, regardless of the size of the business, I won’t note any particular changes but, instead, I will point you to the executive changes section on CollectionIndustry.com: www.collectionindustry.com/jobs/changes/, where all announcements are noted and archived each month.

The IRS is coming
The IRS is close to contracting with private collection agencies for the collection of delinquent taxes, which is expected to be the largest contract opportunity the collection industry has ever seen. The IRS has been authorized to collect on an estimated $250 billion in delinquent taxes and sees $120 billion as potentially collectable. Lawmakers hope that private agencies can bring in $1.4 billion in past due taxes over the next 10 years.

FTC puts a debt buyer out of business
This year will also be marked as the first time that the Federal Trade Commission (FTC) put an ARM company out of business. In December 2004, the FTC shut down Capital Acquisitions and Management Corporation (CAMCO), a debt buyer focused on out-of-statute receivables. In March, CAMCO was ordered to pay a $300,000 penalty for violating the Fair Debt Collection Practices Act (FDCPA). At that time, the FTC charged that CAMCO engaged in abusive and deceptive ways to collect money. Eight months later, investigators say the complaints did not stop. In the past, the FTC has levied fines against a relatively small number of agencies alleging that they violated the FDCPA. Never before has an FTC investigation resulted in putting a collection company out of business.

Mike Ginsberg is President and CEO of Kaulkin Ginsberg Company, which, since 1989, has provided owners, investors and executives with the advice, expertise and information needed to grow or sell their companies. Kaulkin Ginsberg is the most recognized source of M&A, research and consulting services for the Debt Collection and Accounts Receivable Management industries. The Kaulkin Media division publishes the leading credit and collections website, insideARM.com, as well as several popular electronic newsletters.

Mike has served as chair and keynote speaker at numerous association meetings and industry conventions. He is a member of the board of the Institute of Merger and Acquisition Professionals (IMAP), a member of the Association for Corporate Growth (ACG), and a member of the American Collectors Association (ACA) and Debt Buyer’s Association (DBA). He also serves as an expert witness, and sits on the advisory boards of several industry associations and publications. Mike can be reached at (301) 907-0840 or at mike@kaulkin.com.