Taking a Breather

  Big mergers and acquisitions in the ATM ISO industry have slowed as buyers digest past purchases, but deal-making may soon pick up again.
  The consolidation of off-premise automated teller machine portfolios in the past few years has been highlighted by multimillion-dollar purchases of independent sales organizations by such disparate companies as transaction processors and Internet-based banks.
  That consolidation, however, appears to have slowed among the largest ATM ISOs, as the companies have been working to shore up finances and to grapple with impending new ATM requirements. Merger activity involving mid-size ISOs, though, remains relatively strong.
  Those are among the findings from this year's annual ISO survey by CCM's sister publication, ATM&Debit News. The survey found that the number of ATMs operated by the top-10 ISOs was up 8%, to 72,381 in April from 66,900 as of last June. That compares with a 15% rise from June 2002 to June 2003.
  The largest ATM ISO, Scottsdale, Ariz.-based eFunds Corp., experienced a growth rate of 10% in its ATM portfolio, to 17,200 machines from 15,200 last June. New York-based E*Trade Financial Services, the second-largest ISO, has 15,000 ATMs under contract, the same as it did last June.
  Acquisitions slowed over the past year as the largest ISOs focused on the financial performance of their portfolios. "Part of it is digesting the consolidation," says Dale Dentlinger, president of E*Trade Access, E*Trade's ATM management division.
  EFunds several years ago began to acquire off-premise ATM contracts to gain transaction-processing market share and to get economies-of-scale pricing benefits. But the firm more recently has focused on shoring up its spotty earnings, which have become healthier in large part because it cut ATM-related expenses last year.
  EFunds reported net income of $10.1 million in the fourth quarter of 2003, more than 10 times the $881,000 in net income generated the previous year's fourth quarter, when the company was expanding into ATMs. In 2004's first quarter, eFunds doubled its net income to $9.4 million from $4.6 million a year earlier.
  Cardtronics Inc., the third-largest ISO with about 12,500 ATMs under management contracts, also is focusing mostly on finances after doubling its ATM portfolio over the past 18 months.
  Houston-based Cardtronics' most recent major ATM purchase came last August, when the firm purchased 1,704 ATMs from American Express Co. Cardtronics currently is in a "quiet period" because of its pending initial public offering, and executives will not discuss business plans beyond the company's financial documents.
  In those documents, Cardtronics says it hopes to gross about $115 million from the IPO. The company says it will use much of the cash to pay off $31.4 million in debt incurred from purchases and finance new ventures or new acquisitions.
  The major ISO players are being careful not to overextend themselves at a time when revenue from surcharge-based transactions is flat, notes Leon Majors, president of ESP Consulting Inc., an ISO advisor. "The population of (surcharge) fee-paying consumers is limited," says Majors.
  More cardholders are paying nothing to use automated teller machines, Majors notes. Moreover, new regulations in the form of stricter encryption standards and expected new federal rules arising from the Americans with Disabilities Act also are preventing large ISOs from doing more aggressive buying, he says.
  Yet, gaining a major ATM footprint in convenient off-premise locations still remains crucial for the success of off-premise ATM operators. Indeed, it is the larger off-premise players that increasingly are being called upon to support the expanding market of surcharge-free ATM access to users of payroll cards.
  The Bethesda, Md.-based Allpoint surcharge-free network, for example, is using E*Trade's and Cardtronics' ATMs. Allpoint pays the ISOs per-transaction fees when clients' cardholders use their ATMs.
  Several large debit card issuers, including Chicago-based Bank One Corp. and New York-based J.P. Morgan Chase & Co., have signed up to use Allpoint for their payroll cards. EFunds also has its own surcharge-free ATM service.
  Revenue earned supplying free ATM access to holders of payroll cards will continue to grow, Majors predicts. But it will be limited to ISOs that have a national reach.
  The Allpoint connection is a bright spot for E*Trade, says Dentlinger. "We are not stealing transactions from others," he says.
  The Pursued
  For smaller ISOs, consolidation is continuing. Perhaps the largest purchase over the past year involved Atlanta-based NetBank Inc., which had no ATM contracts until it bought Jackson, Miss.-based Financial Technologies Inc. for $17 million last year. NetBank now operates 5,481 ATMs.
  NetBank's ATM acquisitions are part of a diversification into payment services, including transaction processing. The purchases also enhance the Internet-based bank's customer attractiveness and its bottom line, says Tommy Glenn, president of NetBank Payment Systems.
  "This has been a profitable business in the past, and it will add to our earnings per share," says Glenn, who also served as president of Financial Technologies.
  Some observers say demand for smaller ISOs' off-premise automated teller machine fleets is strengthening. "After a period of digestion and regrouping among acquirers of ATM portfolios, deal flow has picked up considerably over the past several months," says Sam M. Ditzion, president of Boston-based Tremont Capital Group, which advises ATM companies on acquisitions. "It has become a seller's market for the strongest portfolios."