The Green Sheet Online Edition
December 22, 2008 • Issue 08:12:02
The promise of September 2009
To say that October 2008 was a rocky month for mergers and acquisitions is akin to saying Mt. Everest is a hill. We saw many deals vanish for a variety of reasons. But while it is a buyer's market now, we believe it could once again be a seller's market by September 2009.
One deal breaker for the fourth quarter of 2008 was the tremendous turmoil in the financial markets. Although President Bush recently did acknowledge that we are in a recession, the markets set records that haven't been broken since the Great Depression of the 1930s.
However, unlike in the Depression-era, the federal government was relatively quick to infuse cash into the system in 2008, as well as adapt programs to help ailing banking concerns.
How does that relate to ISO and portfolio acquisitions from a financing standpoint? Well, other than enterprises that like to finance portfolio and ISO acquisitions by charging an annual percentage rate of 18 percent or more, no one was financing these acquisitions.
Many deals we were involved with got postponed or fell apart altogether because financing sources either no longer existed or no longer wanted to finance merchant portfolio acquisitions.
As if it weren't already tough enough to finance deals in this environment, another development suffocating deals was the revenue attrition that most portfolios saw in September and October 2008. Portfolios that just a few months earlier were experiencing single-digit annualized attrition levels were seeing double-digit revenue attrition. And I don't mean low double-digit attrition.
Some portfolios, which under normal circumstances were very healthy, experienced annualized revenue attrition above 30 percent. Attrition numbers like that don't make lenders comfortable. Indeed, if lenders weren't already sufficiently panicked about the stock and other financial markets, 30 percent (or higher) attrition rates helped them justify refusing to finance in the payments space.
When we speak of revenue attrition, we look at all active accounts in a portfolio from a sample month in 2007. Then we look at the same month from 2008, and we see how much revenue those accounts are still generating.
We do not factor in new accounts that were boarded during the year. This is called a static pool analysis and is typically how most financing sources evaluate portfolios as well.
The good news is if you are signing on plenty of new accounts, and if they are substantially offsetting the revenue attrition as calculated above, your ability to generate new revenue-producing accounts will go a long way toward making buyers and their financing sources comfortable with your ability to mitigate revenue attrition.
Some ISO acquisitions in which buyers were willing to go forward fell apart because their funding sources insisted that they be entitled to renegotiate the multiples they were going to pay in light of lower valuations taking place in the public markets.
An ISO-level transaction is a carefully orchestrated event. After buyers and sellers have spent months of give-and-take, it is a complete turn off for buyers to come back to sellers late in the game and say they're looking forward to completing the acquisition, but their funding sources are insisting that they pay less for it.
Most likely, this phenomenon will continue into the first quarter 2009 with any enterprise-level acquisitions in which the price was agreed upon before the stock market's staggering declines and the failure of many financial institutions.
Anyone involved in such a transaction to save time and money by having an immediate heart-to-heart with the other parties involved so that lender, seller and buyer have a reality check. Under the current circumstances, this should be a weekly event.
One could argue that, other than some residual sales and some large bank portfolio spinoffs, there was no market for ISO and portfolio sales in the fourth quarter 2008. Buyers were sitting on the sidelines, either trying to find new sources of financing or believing there would be carnage in the market, which would afford them bargain-basement prices.
Sellers of mid-sized portfolios or ISOs were either in a daze from looking at their September and October declines, or they just believed that now is not the time to sell.
Does that mean it is a buyer's market? Opportunities always exist for both buyers and sellers. Certainly there are many small banks looking to put cash on their balance sheets any way they can. And an easy way to do that is to monetize their merchant portfolios. If there is value to be had in the marketplace, perhaps it is to be found there.
Most ISOs and banks that have merchant processing portfolios saw a dramatic drop in revenue and transactions in September 2008. If we assume the duration of 2008's economic activity and the balance of 2009's activity will be lower than in 2007, September 2009 looks promising. Why? Because when buyers of merchant portfolios perform their preliminary analysis, they most often perform a static pool analysis of revenue attrition.
If September 2009 is as sluggish as September 2008, a year-to-year comparison may not look as dramatic as it did for September 2008 versus September 2007. One might anticipate revenue attrition may recede to levels typically considered to be normal.
If we are fortunate enough to see a minute increase in economic activity, we could see single digit revenue attrition loss or even (dare I say it) positive revenue growth.
Lane Gordon is Managing Partner at MerchantPortfolios.com, a company specializing in marketing ISOs and portfolios for sale. Prior to MerchantPortfolios.com, he spent a number of years working in the payments industry. Gordon holds degrees from the Massachusetts Institute of Technology and Carnegie Mellon University. He can be reached at 866-448-1885, ext. 301; firstname.lastname@example.org; or by fax at 508-638-6444.
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