Expect Deals To Keep Industry Abuzz All Year

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The direct marketing industry is setting all-time highs for merger and acquisition activity, and teleservice deals continue to be among the fastest growing segments.


In 1997, there were 50 mergers and acquisitions involving teleservice companies--up a tremendous 39 percent from 36 deals in 1996. The first quarter of 1998 is also a winner with 15 teleservice deals, up a notch from 14 deals during the same period in 1997.


Several trends are driving mergers and acquisitions among teleservice companies. The most prevalent trend for both 1997 and first-quarter 1998 is involvement of a teleservice industry conglomerate, which accounted for 48 percent of the deals in 1997 and 33 percent of first-quarter '98 deals.


Teleservice conglomerates are firms that are making a multitude of acquisitions in order to maximize efficiencies and expand their customer base. Some teleservice conglomerates are designed as acquisition vehicles with an objective of "rolling up" many companies to gain critical mass and enhance profits through consolidation (e.g. TeleSpectrum Worldwide, Compass International, International Data Response). Other conglomerates are simply strong companies that are making acquisitions as part of a market and customer expansion strategy (e.g. Sykes Enterprises, Sitel).


Traditional consolidation accounted for 18 percent of teleservice deals in 1997 and 33 percent in first-quarter '98. This classification includes those deals that occur through the merger of similar-sized teleservice companies or by the acquisition of a smaller teleservice company by a larger telemarketer. The objectives of the deal are the same as those of conglomerate deals, it is just that the companies making these acquisition are not viewed as deal machines. Matrixx, Opinion Research, APAC are among the companies that completed traditional consolidation deals over the past year.


Since January 1997, several companies that use the telephone as their primary source for selling goods and services were involved in teleservice industry deals. Telemarketing company transactions accounted for 18 percent of all teleservice industry deals for 1997 and 7 percent in first-quarter '98. The most significant telemarketing company transaction was HSN's acquisition of Ticketmaster.


Divestitures of teleservice operations or non-core assets of teleservice companies accounted for only 6 percent of deals in 1997, but nearly one out of every four teleservice deals for first-quarter '98. TeleSpectrum is leading the charge, having divested two divisions that were part of the company's poorly executed roll-up of a couple years ago. Matrixx and Sitel have also recently divested non-core assets.


The last significant trend impacting teleservice industry deals is that of marketing service companies (i.e. agencies, sales promotion companies) acquiring teleservice businesses. Ten percent of 1997's teleservice deals involved marketing service companies and thus far in 1998, there have been no transactions of this type. HA-LO Industries, Rapp Collins and Corestaff made teleservice acquisitions in 1997.


What teleservice industry deals are in store for the rest of the year? I expect the year will end with a 20 percent increase in these deals and that big players will continue to get bigger through acquisitions. The buyers will also continue to expand to non-teleservice segments, including staffing service companies, which are professionals at employee management, and marketing service firms, which need telemarketing as a core competency.


<I>Michael Petsky is managing director of Gruppo, Levey & Capell Inc., (WHERE) an investment bank that focuses exclusively on the direct market industry.<I>


Teleservices Industry Deal Classification Analysis


(# Deals)


1997 1st Quarter 98


Deal Classification # % # % Examples


Conglomerates 24 48% 5 33% IDRC, Sykes, Sitel, ProCommunications


Consolidation 9 18% 5 33% Matrixx, Opinion Research


Divestitures 3 6% 4 27% TeleSpectrum, conglomerate non-core divs.


Telemarketers 9 18% 1 7% Ticketmaster, TeleServices Intl.


Marketing Service 5 10% 0 9% HA-LO, Corestaff, Rapp Collins


Total 50 100% 15 100%

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