CONSOLIDATION’S BIG IN THE MONEY GAME
Byline: Thomas J. Ryan
NEW YORK — Merger mania is in full swing in the factoring market.
The factoring market has been roiled this year by CIT Group’s acquisition of Congress Talcott in March and General Motors Acceptance Corp.’s (GMAC) acquisition of BNY Financial, the factoring arm of the Bank of New York, in June.
The big rumor running through the factoring community now is that Heller Commercial Services, the factoring arm of Heller Financial, is on the selling block. Among the rumored buyers are General Electric, Bank of America Commercial and SunTrust Bank. A Heller executive said the company did not comment on rumors.
Last year, GE Capital, the financing arm of General Electric, acquired First Factors to mark its first entry into the U.S. factoring market, and Century Business Credit was acquired by Wells Fargo, which also owns commercial finance firms Norwest Corp. and Foothill Capital Group.
Just as in the retail and vendor arena, the mergers are being driven by the desire for growth since many of the large factors are owned by public companies, and they need to build volume to push up the stocks. With flat-to-meager gains in overall U.S. apparel volume and few start-ups, the main way to grow volume over the last few years has been by aggressively raiding another factor’s portfolio, generally by enticing clients with lower commission rates.
But factors said the easiest way to build volume is by acquiring a competitor outright. Also, factors said the cost savings resulting from mergers helps offset the lean margins caused by the abysmally low lending rates as well as by fixed costs. A slew of banks has bought factors over the last few years, partly to take advantage of cost synergies.
“This is definitely a business of scale,” said Stuart Brister, who is head of factoring at Bank of America Commercial.
That institution last month changed its name from NationsBanc Commercial after its parent company’s merger with BankAmerica Corp. in September 1998.
“Plus, there’s tremendous technology costs to doing business these days, and some can afford to spend the money and some can’t.”
Steve Sargent, president of GE Capital First Factors, said that given the compressed margins in the factoring industry, heavy technology investments and “attractive premiums” seen in some deals, some factors “may question whether it makes sense to hang around.”
GMAC paid a whopping $1.8 billion for BNY Financial.
For clients, banks and financial giants like General Electric, GMAC and Wells Fargo are expected to provide greater lending support and expertise to the factoring market, particularly in arranging asset-based loans.
However, a few factors privately noted that in recessionary times, banks tend to dump off their risky factoring operations.
Still, while the mergers may be thinning the ranks of factors, opportune factoring possibilities remain plentiful for vendors, because every factor is aggressively looking for new business.
“There’s a lot of pressure because there is not a lot of new business around, so it’s tremendously competitive,” said John W. Kiefer, president at Capital Factors.
“It’s still creating a lot of stress on margins.”
Harold Dundish, senior vice president at Finova Capital, also noted that new methods of financing are constantly evolving, and the entrepreneur will adapt should factors ever become in short supply.
“As a businessman, you’re always going to find a way to get around it, but it’s more difficult,” Dundish said.
Finally, Stanley Officina, president at Sterling Factors, observed that when two factors merge, the amount of exposure they take combined, on an individual retailer, is normally less than the two did separately.
But Officina said vendors can and are increasingly taking on a second factor if one factor does not offer enough trade support.