News last week that North American Bancard has hired a financial advisor to help sort out its future and that Merchant Data Systems Inc. has purchased a 1,300-merchant ISO potentially is signalling a resurgence in mergersand acquisitions among portfolio buyers and sellers. It also signals further consolidation in the ISO and merchant-acquiring industry.
North American Bancard’s decision to hire Deutsche Bank Securities is to “explore the opportunity to strategically align ourselves with financial partners to pursue any opportunities,” Marc Gardner, the ISO’s president, tells ISO&Agent Weekly.
“We feel there will be big opportunities to consolidate entities within the merchant-acquiring space, and we want to be well-positioned for the opportunity,” Gardner says.
Reuters news service, citing anonymous sources, reported last week that the hiring of Deutsche Bank was a sign of a “possible sale.” However, Gardner says North American Bancard is “committed to this space, committed to the business. We aren’t going anywhere. We’re here for the long term.”
“A number of large financial firms” approached North American Bancard in 2009 to “pursue industry opportunities,” the Troy, Mich.-based company stated in a press release.
North American Bancard is looking for entities that have “entrenched customer-acquisition programs in the ISO industry today and are well-established” in the United States and Canada, Gardner says. “We’d like to continue to grow and be aggressive as these opportunities come to market,” he says.
Sales Engine
Meanwhile, Merchant Data Systems announced last week the purchase of ISO Merchant Services, an ISO with 1,300 merchants. Terms were not disclosed.
The two co-founders of Delray Beach, Fla-based ISO Merchant Services, Harvey Loewenstein and Jay Wertheim, are staying with the company, Drew Freeman, Merchant Data Systems president, tells ISO&Agent Weekly.
“We bought the sales engine,” Freeman says, referring to the sales force and its structure of agents. Loewenstein and Wertheim have “done a great job recruiting [sales] agents.”
Miami Beach, Fla.-based Merchant Data Systems’ model provides owners of acquired companies the option to stay with the company, but it assumes at least a 51% ownership stake in the acquisition, Freeman says.
“Primarily we like partners that have relationships with agents and still want to work at” merchant sales, Freeman says. “They don’t want to get out.”
Sellers also have the option to receive cash for their ownership share at the time of sale, or they may opt to receive compensation later, when their shares might be worth more, he says.
“We let them choose how much money they may take up front or on the back end,” Freeman says.
Other acquisitions are possible, Freeman says. “We’re looking at about eight possibilities now; maybe three we would pursue,” he says.
M&A Activity
Though merger-and-acquisition activity has been fairly quiet in the past 18 months, activity began to pick up in the fourth quarter of 2009, says Ray Sobczyk, senior associate and strategic acquisitions expert at the Strawhecker Group consultancy.
Sobczyk bases his observations on the number of transactions the Omaha, Neb.-based firm is involved in and the number of other deals he is aware of in the industry.
Sobczyk helps merchant portfolio buyers and sellers make deals.
“We have new players in the market,” Sobczyk tells ISO&Agent Weekly. Venture capital firms in particular are eyeing the midsize to larger deals, he says. “They find the business attractive for its predictable, recurring revenues,” says Sobczyk.
Many sellers rely on building a merchant-sales business so it can be attractive to buyers.
However, the sellers did not have much opportunity to sell their enterprises in the past 15 months, Sobczyk says. It was not because the sellers ran the businesses poorly. Instead, the revenue was not strong because of slow consumer spending, he says.
The sellers without debt may find an increased number of interested buyers because the economy is still in a lull, which lowers the value of a merchant portfolio, Sobczyk says.
“If the retail sales come back strong, the value of those businesses would go up,” he says. “They are in a tempered growth mode due to same-store sales being down.”
As a potential ISO buyer, Mike Rovner, a partner at Austin Ventures, an Austin, Texas-based investment firm, says it is a “ripe time to become part of a rollup” among multiple businesses. Century Payments Inc., with Austin Ventures’ backing, bought four ISOs in 2009 to form a larger company (ISO&Agent Weekly, 4/23/09).
There is no rush to buy ISOs because the economic lull is not likely to turn around soon, Rovner says. “These cycles take a while to turn,” he says. Resurgent consumer spending would increase the revenue an ISO makes, driving up its value, he says.
Still, the impact of the economic downturn is felt widely.
“The declines in the numbers of small businesses and in consumer spending have had a widely felt impact on near-term revenue growth and portfolios,” Rovner says.
“There are folks whose asset bases have not met plan or are declining,” he says. In other words, they are losing money.
Those ISOs with little to no debt can weather the times, Rovner says.
