FrontStream’s Fast Transact Deal Shows Some M&A Thaw

Growing independent sales organization FrontStream Payments Inc. made another deal last week that could be a sign that merger-and-acquisition activity in the merchant-acquiring industry is warming up after a recession-induced chill. The transaction also illustrates that private-equity firms see the merchant-acquiring space as a fertile ground for new investments. In the deal, Brentwood, Tenn.-based FrontStream Payments bought Fast Transact Inc., a Lacey, Wash.-based ISO founded in 2002. Terms were not disclosed. New York City-based private-equity firm Arsenal Capital Partners funded the transaction and took a controlling interest in FrontStream, its first merchant-processor. Three Arsenal executives will become members of the processor's board of directors, and a member of Arsenal's advisory board will act as an advisor to FrontStream's board and management. FrontStream cofounder and chief executive Emmet Seibels tells Digital Transactions News that his company, which raised $14.5 million two years ago from three venture firms, was “not really looking for capital,” but he met Arsenal executives through a friend at Goldman Sachs & Co., the huge investment bank. “We were so impressed with their industry knowledge … that we decided to partner up with them,” Seibels says. “We saw an opportunity to make good acquisitions in verticals we wanted to [be] in.” Seibels says he was introduced to privately held Fast Transact, whose products include payment gateways for online merchants and specialized services for non-profits and churches, by an executive within his organization. Combined, FrontStream and Fast Transact have about $2 billion in annualized charge volume. For competitive reasons, Seibels won't disclose the number of merchant locations. “Together, we believe this positions the newly combined company to better address customer demands for secure, PCI-compliant processing of Internet and POS payment transactions, data-rich reporting, and value-added services,” Fast Transact president and chief executive David Solomon said in a news release. Seibels says Fast Transact's management will stay on, but the company eventually will be rebranded. The Fast Transact deal is FrontStream's third, following acquisitions of the ISOs SaleSynergy LLC, which works in the hospitality and gaming industries, and Direct Technology Innovations, whose services to merchants include a no-liability program for no-signature transactions under $25, online ordering, and mobile-ticketing systems. Earlier this month, FrontStream announced plans to rebrand SaleSynergy under the FrontStream moniker. Arsenal Capital Partners, meanwhile, is one of an increasing number of private-equity firms looking for growth in the ISO sector, which offers attractive recurring-revenue streams and the possibility of effecting mergers in what is still a fragmented industry. “The investment in FrontStream is consistent with our strategy to back growing, technology-enabled services companies in the financial-services sector,” Carty Chock, a partner at Arsenal who is now a director at FrontStream, said in the release. “The acquisition of Fast Transact represents an important milestone in FrontStream's strategy to build a leading merchant-acquiring business with differentiated solutions and sales expertise.” Seibels says he's seeing a bit more M&A activity in early 2010 than he did a year or so ago, but not throughout the ISO sector. “I think at the large level it's heating up, but for the mid-to-small acquisitions, there's still a gap,” he says. Omid C. Tofigh, a partner and co-manager of the mergers-and-acquisition practice at First Annapolis Consulting Inc., sees a bit of a thaw in the market for merchant processors. “We are seeing renewed interest from parties, including financial buyers, that a year ago may have shied away from approaching deals,” he tells Digital Transactions News by e-mail. “However, these buyers, and their investors, are being more selective in their investment strategies by focusing on deals that provide innovative products and capabilities or differentiated growth channels. In 2010, we think that deal activity will increase as the bid-ask spread between buyers and sellers continues to shrink, although the industry will continue to be wary of large valuations in an effort to avoid mistakes of the past.”