Top Reasons Why ARM M&A is Looking Up

Earlier this week, we released the results for the third quarter for mergers and acquisitions in the ARM industry. By the numbers, activity was light with 5 transactions closing totaling approximately $132 million in deal value, nearly half the number of transactions completed in Q309.   Year to date results tell a similar story with 23 transactions completed, down from 29 deals last year.

This only tells part of the story.

Total deal values are up some 400% over last year – So far in 2010, the ARM industry has generated approximately $850 million in total deal value, up from $200 million in value during the first three quarters of 2009.  Average deal sizes have gone up five fold since last year which means that larger deals are getting done compared to last year’s results.

Liquidation performance is stabilizing – We are starting to experience some stabilization in the market after nearly 2 years of economic downturn.  Most agencies have shared with us that they are experiencing a lift in recovery performance this year after experiencing drops of 10-20% on the low end to as much as 50-60% from 2007 to 2009.  We all continue to watch the unemployment and underemployment rates very closely, key economic indicators of recovery performance for collection agencies.  While unemployment levels have not dropped, they appear to have leveled off at 9.5% which may be the start of a long recovery process.

Buyers have dry gun powder and are ready to deal – Corporate America has almost $1 trillion dollars hoarded on its balance sheet and private equity firms reported to have over $600 billion in uninvested capital approaching near term investment period expirations.

Overall pricing is still lower except for top performers – Acquisition multiples, for the most part, are still below pre-recession levels.  This is due to questions about top line and bottom line financial performance sustainability as well as the relatively high cost and low accessibility of debt financing.  Most transactions that are getting done involve a component of deal structure (i.e. earn-out, sellers’ note, retained equity) to share risk and bridge value gaps.  However, strong companies with proven management teams in place are generating higher-than-average pricing levels with comparatively attractive deal structures.

Meet with Mark Russell, Michael Lamm and me today online at Expo 10.6.10 in the networking lounge or at our booth to chat about market conditions.