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Commentary: Polishing your portfolio

Dove Consulting offers some tips to help ISOs determine the value of their ATM portfolios. According to Dove's consultants, the market holds unprecedented opportunities for ISOs to sell some or all of their units on favorable terms. But ISOs must be able to demonstrate their points of uniqueness relative to what buyers want to capitalize on the seller's market.

February 25, 2002

Ann Schmitt

After a period of slow growth, the non-bank ATM deployer market is consolidating - and this time, rapidly.

Dozens of large deals will be made this year. Some of these transactions will be high profile, like the eFunds acquisition of Hanco's 2,500 U.S. units earlier this month, but most deals will remain behind the scenes.

For ISOs, the market holds unprecedented opportunities to sell some or all of their units on very favorable terms. But the opportunities must be earned; the ISO must be completely in tune with the 2002 market and clearly demonstrate their points of uniqueness relative to what buyers want. ISOs will achieve maximum return by "polishing" their portfolios to the tastes of potential buyers.

Sam Ditzion

Although the valuation process is quite complex, here are some areas buyers will scrutinize most closely:

• Contract quality. The most critical determinant of value is the extent to which the portfolio consists of high quality, long-term contracts. Informed buyers will conduct thorough analysis during the due diligence phase of an acquisition to identify the likelihood of contracts potentially falling through after the deal closes. 
• Maintenance. Buyers are most attracted to portfolios that have sufficient maintenance capabilities in place. This is particularly relevant for situations where the acquirer is entering an unfamiliar region beyond its existing service area.
• Profitability. Few buyers seek to purchase unprofitable units with the hope of turning them around. Portfolios that are already cash flow positive and achieve profitable transaction volume on a per-machine basis will be most desirable. Buyers will pay a premium for ISOs with a fully optimized P&L that would be scalable for the acquiring entity.
• Growth potential. Lastly, some buyers are attracted to deployers that have a realistic and sustainable growth strategy that includes both organic growth and growth through acquisition.

Despite the recent trend toward consolidation within the industry, most ISOs - who frequently receive unsolicited offers - are unaware of how to find the buyer that is willing to pay maximum value for a portfolio. ISOs contemplating selling their business should strongly consider getting a professional valuation as the first step.

For two decades Dove Consulting has helped financial services industry leaders make and implement important strategic decisions, including those that involve mergers, acquisitions and divestitures. Through Dove Capital Partners - an affiliate of Dove Consulting - we offer M&A advisory services and the design and execution of deals.

Ann Schmitt is an expert in electronic payment systems, including ATM, debit, credit and merchant processing. Sam Ditzion specializes in M&A advisory services within the financial services industry and has conducted extensive analysis on advanced functionality ATM technology. 

For more information, contact Ann Schmitt at 303-663-2048 or Sam Ditzion at 617-753-9275.