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, a senior associate and strategic acquisitions expert at the Strawhecker Group consultancy who helps merchant-portfolio buyers and sellers make deals. And the activity is expected to continue this year.
Among the recent examples, Merchant Data Systems Inc. bought a 1,300-merchant portfolio announced last week (see story). And payment processor and ISO North American Bancard has hired Deutsche Bank Securities as a financial advisor to “explore the opportunity to strategically align ourselves with financial partners to pursue any opportunities,” Marc Gardner, president of the Troy, Mich.-based ISO, tells PaymentsSource (see story).
Sobczyk’s views are based on the number of deals Omaha, Neb.-based Strawhecker is involved in and on other deals he is aware of in the industry.
“We have new players in the market,” Sobczyk tells PaymentsSource. 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 (see story).
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. A resurgence in 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.” In other words, they are losing money.