Is a Massive Consolidation Underway in the U.S. ARM industry? The Answer Might Surprise You.

Transworld Systems Inc. (TSI) announced on Monday (June 7, 2021) that it acquired Account Control Technology (ACT). Is a massive consolidation underway in the U.S. accounts receivable management (ARM) industry or is this simply another opportunistic purchase by an active industry buyer?

Before I answer this question, I want to look at the timeline of events that shaped TSI. In 2014, private equity firm Platinum Equity acquired the ARM businesses of Expert Global Solutions (formerly NCO Group) including Transworld Systems, education, attorney network, healthcare, government, and U.S. based third-party collections. They named the combined businesses Transworld Systems Inc. Like other large players in the U.S. ARM industry, TSI suffered from the loss of the U.S. Department of Education’s unrestricted contract, and, in May 2018, the company completed a financial restructuring with Clearlake Capital. TSI started making acquisitions a big part of its growth strategy, purchasing a series of smaller size collection companies before acquiring Alltran Financial Services in January 2020. Less than three weeks ago, TSI announced that it acquired certain assets of Performant Financial, and, earlier this week, the company announced that it acquired ACT.

Back to my question. I do not believe the ARM industry is experiencing a massive consolidation. Yes, there is a tremendous amount of merger and acquisition (M&A) activity taking place currently, especially in the healthcare, commercial, and consumer finance sectors. We expect this trend will continue into the foreseeable future for the following reasons:

  1. Interest rates remain low, and financing is readily available to complete transactions.
  2. Capital gain tax rates, expected to increase significantly, remain unchanged to date and some owners want to get a deal done before rates increase.
  3. Capital expenditures continue to increase, fueled by technology improvements and regulatory oversight. Some owners don’t want to make these investments to remain competitive.
  4. ARM companies, for the most part, are performing well financially.
  5. Some ARM companies are seeking to aggressively diversify and expand through acquisition.
  6. Investment companies are attracted to companies with high profit margins and sustainable growth, trends many ARM companies are experiencing.

However, this level of activity does not equate directly to a massive consolidation. The ARM industry is naturally competitive. Most credit grantors resist using one collection vendor for all of their recovery needs. Instead, they tend to use multiple vendors who aggressively compete for their business. This will not change.

The ARM industry also experienced a significant amount of deal activity in the past. In the late 1990s and early 2000s, for example, nine of the ten largest U.S. ARM companies were involved in at least one transaction. The only exception was GC Services, a company that was acquired by a private equity firm just a few years ago.

While no company, large or small, is immune to selling out, this industry will remain competitive with multiple companies serving the needs of large and small commercial, consumer, and government credit grantors. If you’d like to schedule a confidential call to discuss your M&A or business strategy in general, please contact us here or email hq@kaulkin.com.

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