I was at the MWAA speaking a few months ago and was asked the question about the “opportunity for smaller ISOs and acquirers to take advantage of the private equity money being poured into the payments arena.” It is a great question as payment companies of all sizes are now currently acquisition candidates as mega-acquirers (often backed by private equity or venture capital) are looking to build scale and distribution. Everyone is a potential candidate today.
    In the past, only the largest of ISOs that “owned” (have portability rights in) their merchant portfolios were targets of acquisitions. These ISOs built huge independent contractor sales forces and then were consolidated in an industry roll-up creating a super ISO or mega- acquirer. PMT which was later acquired by NOVA was an example of just this type of ISO roll-up. However, we have seen many changes in the payments industry that have changed the acquisition target make- up. The cost of technology has dropped and pure merchant acquiring has become somewhat of a “commodity.” At the same time, acquiring merchants organically has become more difficult making the value of distribution increasingly important. This is easily illustrated by reviewing the revenue chain of a transaction: wherein the ISO makes 90% of the merchant spread and the processor a mere 10%. The processor has almost all the technology and intellectual property but the lion’s share of the revenue goes to the ISO. Sales channels are everything and herein lies the opportunity for every ISO.
    The private equity organization will still look for its first acquisition to be a company they can use as a platform on which to grow. However, future acquisitions do not necessarily need to be “platform” buys. What they need to provide is distribution and generally distribution that either complements or supplements the existing platforms channels. Types of valuable distribution could be:

• Telesales
• Independent Contractor Sales
• Agent Bank Sales & Service
• VAR Sales & Service
• Vertical Product & Sales

    Today, an ISO’s existing portfolio may or may not need to be moved from the pre-acquisition acquirer. Obviously, there is greater value if it can be moved, but what the acquiring entity is really after is the new business generated from the acquired company (new sales channel) and to even provide a catalyst for growth to that channel. That catalyst could be in the form of more or better product, pricing, support or management. Both the private and public markets reward high growth companies and it is distribution that drives growth in our business. Yes, technology plays a big roll and technology can be acquired or partnered into, but the greatest value and the greatest piece of the revenue equation is in distribution. So can your small ISO be of value to someone? Yes, without a doubt. A company’s valuation price is based on the value of it’s projected future cash flows. Growing revenues and profits drive those projected future cash flow models and make your enterprise more or less valuable. Focus your efforts on building a well-honed distribution channel or sales machine and you will become more relevant and more valuable as time progresses. Selling for decent multiples is not just for the big boys anymore.

Greg Cohen is President of Moneris Solutions U.S., and manages all U.S. initiatives and operations for Moneris Solutions. Mr. Cohen can be contacted at 847-520-6559 or via email at greg.cohen@moneris.com.