Legions of potential investors are clamoring to buy a piece of the merchant-acquiring business, but most ISOs would prefer not to sell. Both camps appear to believe the industry represents a safe haven in hard times and a promising prospect during a recovery.
The number of prospective buyers actively seeking deals has doubled in the first half of this year, compared with the same period in 2009, says Jamie Savant, a partner in The Strawhecker Group, an Omaha, Neb.-based payments consulting firm. The uptick in interest among buyers began in the fourth quarter of last year and carried over into this year, Savant says.
A Gulf In Expectations
Many of the suitors are looking to buy into the acquiring business for the first time, notes Ray Sobczyk, head of Strawhecker’s mergers and acquisition division. Outsiders are attracted by the industry’s recurring revenue stream, relatively low risk and modest capital requirements, he says. Most of the newcomers have cash to invest and thus have little need for leverage, Sobczyk says, adding that “there is debt only in the mega deals.”
Yet that liquidity and intense interest in the industry have not spawned many deals, says Mike McCormack, president of Palma Advisors LLC, a Fort Lauderdale, Fla.-based payments consultancy. He blames the lack of mergers and acquisitions on a “gulf” between the expectations of buyers and sellers.
Investors are seeking bargains based on ISO performance over the last 18 months, a period marked by declining same-store sales and attrition among merchants, while sellers are looking back at four to five years of mostly solid performance and view recent troubles as an aberration, McCormack says.
One member of the industry puts it this way: “If you have the capital, you look for bargains.” That observer, Eli Rubin, an account consultant at Simi Valley, Calif.-based BR Merchant Service, also says that “two things happen in a recession—the poor get poorer and the rich get richer.”
Review All The Factors
Whoever stands to gain, values in the merchant acquiring business have declined from the peaks of 2006 and 2007, but no one seems sure how much, McCormack says. In his view, some potential investors are “testing the bottom of the market, wanting good assets at distressed prices.” Sellers understand their portfolios have lost value, but buyers think they have lost much more value, he says.
Two-year rolling averages of net revenue multiples declined from 4.11 in 2008 to 3.23 in 2010, according to a study of 72 transactions over 10 years by The Strawhecker Group. However, observers emphasize that ISOs vary dramatically and thus have widely divergent value.
“The value depends upon the property,” says the Strawhecker Group’s Savant. His Strawhecker colleague Sobczyk agrees, emphasizing that “buyers and sellers should not lock in on the multiple but instead look at all the factors.”
Their firm sets out a list of those factors. ISOs that sell for high multiples, the consultancy says, share characteristics that include a sales force, annual sales growth of more than 10%, yearly merchant attrition rates of less than 15%, solid net revenue margins, strong management teams, ease of merchant account portability, a sustainable strategy or market niche, low losses, good profitability and good cost synergies for the buyer.
Sales Engines
In particular, today’s potential buyers shy away from acquiring portions of portfolios, preferring to take over entire ISOs, including merchant accounts, sales engines and technology platforms, says McCormack. Without a sales staff to keep and attract merchants, a portfolio necessarily constitutes a declining asset as merchants fall out over time, he notes.
Take the example of the potential investors inquiring about Warminster, Penn.-based Advanced Merchant Services. Buyers want to purchase the ISO “lock, stock and barrel,” says Michael Wiener, president and CEO.
He reports that investors began calling in January to express interest in buying his family-owned business. The calls have been coming once or twice a month since then, he says.
Wiener is receiving inquiries directly from potential buyers and from third parties seeking to arrange a deal, Wiener says. McCormack notes that investors from outside the industry have begun attending trade shows and perusing trade magazines to familiarize themselves with the industry.
One of the offers Wiener received was gratifyingly high, he says, noting also that his company’s sales have doubled in the past two years. “When I got into this business 10 years ago, I was looking for something totally recession-proof,” he says. “I certainly haven’t been disappointed.”
