Corporate America Discovers Payments - Digital Transactions

In other words, high attritionmeans more uncertainty for would-beISO or portfolio buyers, which meanslower pricing. And the merchant survivorsare struggling with reducedcredit card transaction volumes,somewhat offset by higher debit cardvolumes—yet another pull on prices.“A lot of ISOs took a 15% to 50%reduction in their volume,” says Noble.“If you’re doing a lot of new startups, Ithink you took a heavier hit.”Getting a ‘Jolt’Potential buyers also are seeing moreISOs with inactive merchants, whichfurther devalues the business.“When we do a valuation, oneitem we give a lot of merit to isthe percentage of processing activemerchants,” says North American’sGardner. “What’s being sold is thefuture cash flow and the retention ofthat cash flow post-acquisition.”In the deals that it has brokered,The Strawhecker Group has generallyseen multiples holding up but overallprices paid down. “It’s just that they’regoing for less because they’re havingless revenues or EBITDA [earningsbefore interest, taxes, depreciationand amortization],” says Sobczyk.And for 2010? No radical improvements,but perhaps more volume,though not much change in pricing.“I think that 2010 will largely mimic2009 in the area of need to sell,” saysElavon’s Passilla.Randy McCoy, operating partner atThe ComVest Group and the new chiefexecutive at Cynergy Data, agreesthere will be more volume, in partbecause sellers who so far have refusedto accept lower valuations will swallowhard and cut their asking prices.“You’re going to see a lot more volumeof portfolio sales next year at pricesthat are low,” he says, adding that, “Themajor factor that will drive portfolios isa productive sales engine.”Private-equity firms will becomeincreasingly active in the market,Sobczyk predicts, and that could begood news for sellers that offer potentialbuyers recurring revenue streams.Processors may have depressed revenuesnow, but “when the economyrevives, they’ll get a jolt,” he says.And when that jolt comes, it willbe a good time to buy. DTCynergy Data Begins Its Post-Bankruptcy LifeThe story of Cynergy Data LLC, the big independentsales organization that filed for bankruptcy Sept. 1,isn’t a typical one in which an ISO changes hands. TheComVest Group, a private-equity firm with holdings inother payment processors, bought Cynergy’s assets inlate October for $81 million after the debt-laden ISO filedfor Chapter 11 reorganization in U.S. Bankruptcy Court.According to Randy McCoy, Cynergy Data’s newchief executive, Long Island City, N.Y.-based CynergyData’s balance sheet is cleaned up and the company isready to pursue new business.“It’s a strong testament to the company that it continuedto process thousands of [merchant] applicationseven during the bankruptcy process,” says McCoy, whoalso is operating partner at ComVest and chief executiveof another processor ComVest controls, Alpharetta, Ga.-based Pipeline Data Inc.Cynergy Data filed for bankruptcy after takingon $83 million in debt since 2007 as well as runninginto accounting troubles and then the recession, whichhas slammed the credit card transaction volumes ofmerchant acquirers nationwide. The bankruptcy petitionlisted assets of $109.5 million and debts totaling$186.2 million. The debt was the major reason Cynergysought protection from creditors, according to McCoy.“It was really just debt service,” he says. “They wereclearly overleveraged.” Apart from its debt obligations,however, “the company was always profitable,” he adds.Through relationships that include more than 40smaller ISOs and 300 agents, Cynergy Data servicesnearly 80,000 merchants that generate about $10 billionin annualized charge volume. Chicago-based HarrisN.A. is the company’s sponsoring bank into the Visa andMasterCard networks.Cynergy Data filed for protection in the bankruptcycourt in Wilmington, Del., with West Palm Beach, Fla.-based ComVest as its probable but not assured buyer.A two-part, court-supervised auction process called forCynergy Data to be shopped. McCoy says a number ofwould-be buyers emerged.“Four of them bid very aggressively,” he says,declining to identify them. ComVest, however, wonthe so-called stalking-horse position that gave it anadvantage in the second part of the process. The courtapproved the sale Oct. 9.ComVest’s winning bid included $35 million in equityand was just under three times net residuals (revenuesafter interchange, payments to downstream ISOs, andcertain other expenses), a valuation McCoy calls strong inlight of a weak merchant-processor sales market. But hesays Cynergy Data is more than just a sales organization.“We really don’t view Cynergy as a portfolio deal,” hesays. “Cynergy is a technology platform servicing ISOs.”Cynergy Data’s former chief executive, Marcelo Paladini,remains with the company as vice chairman andexecutive vice president of business development.14 digitalDecember 2009