News

ISOs getting urge to merge

Like automobile companies, EFT networks and other industries before it, the highly fragmented retail ATM business seems to be starting to consolidate.

February 12, 2002

By the time the 1930s rolled around, the American automobile industry was a crowded field. Dozens of companies rolled cars off their assembly lines, with names like Studebaker, Cord, Packard and DeSoto.

Those names and others are part of history now, run out of business or swallowed up by the so-called "Big Three" of General Motors, Ford and DaimlerChrysler.

Just six years into the era of surcharging, the ATM field is crowded with hundreds of big and small players, from giants with several thousand machines to garage operators overseeing a dozen.

But moves by behemoths like E*TRADE, American Express, and now eFunds, into the ATM business could signal a similar consolidation in the industry as small independent sales organizations (ISOs) find they can't resist the money being dangled for their portfolios.

A similar trend occurred with the EFT networks that handle ATM transactions, said Doug Deitel, executive vice president of Houston-based ATM company Cardtronics. Network deals in the past 18 months alone have included: Concord EFS' purchase of Cash Station and Star Systems; Genpass Technologies' purchase of Moneymaker and Money Belt; PULSE's purchase of Money Station and merger with TYME; and First Data's taking an ownership stake in NYCE.

"Now there are fewer networks, and they are very large," Deitel said. "The same thing is happening at the ISO level."

Cardtronics is in the middle of this movement. Its recent deal to buy the 1,100 ATMs operated by McClane FSP pushed Cardtronics' portfolio past the 7,000-machine mark and into the ranks of the nation's top-five ISOs.

"As you build your network, you have the capacity to get better and better rates from your vendors," Deitel said. "The smaller ISO just starting out can't match my prices for armored (car), can't match my prices for service."

Deitel estimated there are some 250 ISOs in the business now, but he expects that number to shrink considerably over the next few years.

Mickey Brown, president and chief executive officer of Automated Technology Machines, a New Orleans-based ISO, agreed.

With 700 machines around the country concentrated in hotels and resorts, Brown's company is bigger than many ISOs but still small compared to E*TRADE and American Express (with approximately 11,000 and 8,000 machines, respectively). That puts it in the position of both hunter and prey, a fact Brown freely acknowledges.

"We won't rule out acquiring a smaller company or being acquired," Brown said. "There are a lot of players talking to a lot of players."

While the trend is being fueled by the "bigger is better" economic model, another factor is the sobering reality facing many small ATM operators as they attempt to negotiate new leases with their landlords.

The bulk of these leases were signed five years ago, at the dawn of the independent ATM era when competition was light and no one knew what a location was really worth, said Bob Rudinsky, an ATM consultant in Boca Raton, Fla.

"Merchants are now very educated," said Rudinsky, whose Lexus Enterprises also helps broker deals between ISOs. "You've got merchants who signed contracts back in 1996 that charged $100 a month (in rent) who now want $500. That's why a lot of the little guys are selling."

Meanwhile, the larger ISOs can negotiate better service contracts with vendors and undercut their smaller competitors on rental contracts – a classic economy of scale. It's the same reason GM can make cars cheaper than someone working out of his garage.

Like other industries, the sluggish economy is also a factor, Rudinsky said.

"We're in a tough economy right now," he said. "A lot of smaller guys who are making money but not making a fortune are asking themselves whether they should be in this business."

When surcharging became the norm, the ATM business was flooded with entrepreneurs who thought they could plop a machine down anywhere and start counting their riches, Rudinsky said. Many of them didn't know how to run a business, how to research a profitable location or even how to keep the books, he said. As they realize the sheer amount of work involved, some are looking for a way out.

With so many ATM portfolios potentially in play, it naturally raises the question of what an individual location is worth. Deitel said he looks at four main elements: The age and condition of the machine, the transaction volume, the length of the contract with the merchant housing the ATM and the amount of flexibility there is with the vendors serving that machine.

But Brown said nothing is certain in such a new industry.

"I'm not sure anyone has come up with a formula," he said. "There are locations I thought would really work, but didn't."

One thing is for sure, however.

"Everything I hear and everything I read says this is a good time to sell," Brown said. "There's lots of cash out there."

Which can lead to unrealistic expectations, he added. "Many ISOs, I believe, are probably overstating the value of their portfolios. That leads to over-expectations of what they can get when they go to sell."

Rudinsky said the trend toward consolidation doesn't mean the end of the small ATM operator. But he said the little guys who do stay in the business with a couple hundred machines must be smart about it.

He brought up the banking industry in his native New England, which is now dominated by huge banks like Fleet Financial but still well-represented by smaller regional niche players.

"You have to keep your market within reach," he said. "It's the ones who try to have a machine in Kentucky and a machine in Massachusetts and a machine in Ohio who run into trouble."