The nation's weakening economy is suppressing acquisitions in the merchant-acquiring industry.

ISOs and agents are searching for the most opportune deal-one that either delivers the highest dollar value or carries the best portfolio of merchants. Either way, buyers have to work a little harder today to convince financiers the deal will pay off.

"Since April, the market has definitely continued to deteriorate," says Marc Abbey, managing partner of Linthicum, Md.-based First Annapolis Consulting. "Most of it is driven by the headlines in the Wall Street Journal."

Capital is more expensive, and those holding it want more evidence their investment will reap the promised reward before releasing the money. The weakened state of many financial institutions and the uncertainty in the economy are contributing, too, Abbey says.

In April, at the Electronic Transactions Association spring conference, Abbey said economic factors had created a seller's market. Today, conditions have changed.

"It's a good market for buyers-a bad one for sellers," Abbey says.

Still, neither buyers nor sellers need despair, he adds. "Deals will be done even in the hardest markets," Abbey says.

Acquirers will make deals-just not as many, agrees Tom Wimsett, president and CEO of National Processing Co., a Louisville, Ky.-based processor. "M&A activity, not just in our industry but across the country, is down dramatically this year because the capital markets have been so crazy," Wimsett says. However, "there still will be buyers and sellers in the market," he adds.

The cost of capital has increased, which slows down deal-making because it makes deals more expensive, Wimsett says. "That then causes sellers to step back and ask if this is the right time," he says.

But that hesitation does not discourage him because of the market's strengths. "On a relative basis, our industry is still very attractive," says Wimsett. "In one of the toughest economic times we've had in a long time, the industry overall will demonstrate some decent growth, which is more than many industries will be able to report."

At IMS Inc., a Westmont, Ill.-based ISO, Don Smith, president and CEO, is seeking acquisitions, but they must fit a specific set of criteria.

"What we're looking for is what we're missing," Smith says. For example, IMS does not have as strong a set of Internet products as Smith wants. A company that can provide that could become a target for acquisition.

Smith says the economic environment is not affecting IMS.

As a former consultant, he networks with a passel of financiers and can find new funding companies, including a publicly traded private-equity firm he declines to name.

A Compelling Short Term

It is ISOs, such as IMS, that Abbey expects to fare better when it comes to acquisitions than will private-equity firms and other companies that come from outside the ISO industry-the entities he calls "financial buyers."

In April, Abbey's research showed financial buyers made 25% of the merchant acquiring M&A deals, and strategic buyers, such as processors and other large acquirers, made 75% of the deals.

The credit crunch appears more likely to sting financial buyers than strategic buyers, and the former represent a sizable pool of investors. In the 1990s, financial buyers made less than 5% of the industry's M&A deals, he says.

Now the strategic buyers who feel compelled to put off a purchase will have to focus on running their businesses in the short term, Abbey surmises.

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