Industry M&A Deals in 2009; Fasten Your Seat Belts!

2008 ended with a bang when Audax Group, a private equity firm, announced its recapitalization of United Recovery Systems, a market leader within the third party bankcard/credit card receivables management industry.

This deal bucked a couple of the M&A developments that had been unfolding in the second half of ’08 – reduced activity from private equity sponsors due to an inability to access debt financing for transactions, and reduced activity from other buyers because of uncertainty surrounding future liquidation performance within the receivables management consumer markets.

The URS transaction has raised a number of questions from company owners who are wondering what’s in store for M&A in the ARM industry in 2009. While more details will be provided in our Executive Conference Call on January 21st (click here for further details), here are a few predictions to set the stage for our upcoming discussion:

Greater deal volume, less total deal value in 2009 vs. 2008 – 2008 produced just over $2 billion in total deal value from 36 transactions, but over 80% of the deal value was generated by only 5 of the transactions, three of which were private-equity sponsored deals. In 2009, we do not anticipate as many large, private-equity sponsored transactions but we do expect more than 36 completed transactions — mainly because industry buyers are stepping in to fill the void made by private equity and strategic buyers, many of whom are currently sitting on the sidelines to see how the market and economic conditions play out before pursuing acquisition opportunities.

Acquisition multiples will be down slightly from the peak value ranges – We started to see the range of acquisition multiples drop slightly in the second half of ’08 and believe this trend will continue throughout 2009. In Q3 2008, acquisition multiples for large platform companies (those that attract private equity and strategic buyer interest) fell slightly from 6 to 8 times normalized EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to 5 to 7 times normalized EBITDA depending upon the deal’s structure and terms.  This drop was primarily driven by reduced access/increased cost of debt financing and concerns surrounding future account liquidation and financial performance in 2009 and 2010. As we saw with the URS transaction, platform acquisitions are still getting done but they are experiencing greater financing challenges. Add-on acquisitions have basically retained their acquisition multiple ranges – 3 to 6 times normalized EBITDA, depending on the company’s size and the attractiveness of the company’s growth trends, profitability, operational and technological platform, and client base.

Cash will be king – There are still buyers with access to cash and a willingness to purchase companies with all or a vast majority of cash at closing. Sellers should be willing to consider some deal structure (use of earn outs, seller notes, retained equity, etc.), particularly if part of the deal value is predicated on achieving future performance, or be willing to accept a slightly lower valuation in exchange for an all-cash or predominantly cash deal structure.  

Turn around and distressed opportunities will increase – This is a very typical theme as we head into the deepening part of a recession; the percent of turn around and distressed M&A opportunities will increase as a result of bad timing on previous investments into growth initiatives, loss of client business, and/or simply bad luck. While there are several buyers who will express an interest in purchasing distressed companies, make sure that you choose one who understands the inherent value within the client base and infrastructure in order to maximize your value potential.

There is no doubt that 2009 will be filled with uncertainty and change, but these conditions produce great business opportunities for those buyers with smart and patient capital, and for those sellers who are either willing to share the risk in exchange for higher rewards down the road, or take a slight reduction in valuation up front in exchange for all or a vast majority of the value paid in cash at closing.

We will continue to keep you updated on the evolving economic and market conditions, and how they impact M&A activity. We also look forward to sharing more M&A and other industry related information with you during our Conference Call on the 21st.