Analysis

Fintech's 2020 M&A Boom Shifts To Consumer-Facing Targets

Law360 (February 26, 2020, 11:32 PM EST) -- Three financial technology companies have been snapped up in billion-dollar deals so far this year with more to come, industry observers say, as buyers and acquisition targets seek to harness novel technologies, searching for increased scale and probing new consumers as the deal trend evolves from payments infrastructure to consumer-facing products.

In mid-February, Morgan Stanley said it would absorb top financial trading platform E-Trade for a mammoth $13 billion all-stock deal, which was followed by financial software company Intuit announcing its $7.1 billion purchase of Credit Karma earlier this week. These two deals were preceded by Visa shelling out $5.3 billion for financial data transfer technology company Plaid in mid-January.

In Europe, the billion-dollar fintech deal market is alive and well, too, with Worldline unveiling plans at the beginning of the month to buy fellow payments company Ingenico in a deal worth €7.8 billion ($8.5 billion).

The clip at which fintech companies are being acquired by legacy financial institutions, not to mention the billion-dollar valuations, illustrates a realization in boardrooms that fintech is not going anywhere.

"It's the ultimate recognition that fintech is here to stay," Stephen Aschettino, chair of payments technology at Loeb & Loeb LLP, told Law360. "Fintech companies are going to be essential for these [legacy] companies to thrive as they continue to evolve and provide the type of user experience that consumers and others now are expecting."

Riding the Fintech Deal Wave

The size and frequency of the 2020 deals is no aberration. A KPMG report published Monday labeled 2019 a "blockbuster" year for fintech, with global fintech investment hitting $135.7 billion across almost 2,700 deals.

"We've seen a consolidation within the payment space for some time," Aschettino said. "Last year, we saw three megamergers of payments companies. I think that the trend of consolidation at various levels, though not necessarily at the scale that we saw last year, is going to continue this year."

A Ropes & Gray LLP report published in September found that financial executives were bullish on the mergers and acquisitions market for fintech in 2020. According to the report, 72% of financial institutions, including banks, were expecting to purchase a fintech company within two years, whereas just 48% of such companies have picked up fintech companies in the past two years.

"This trend is probably more indicative of the maturation of these companies, of the market demand on them to scale up and to generate profits at the level," said professor Saule Omarova of Cornell University Law School, who focuses on financial regulation and previously worked at the U.S. Department of the Treasury as a special adviser for regulatory policy.

"We're clearly right now in the bull market, especially when it comes to fintech and financial institutions," she said.

According to the Ropes & Gray report, the top considerations driving the acquisition of fintech companies range from expanding product and service offerings to intellectual property and the ability to leverage new technologies.

Omarova noted the speculation in the market that behemoth financial institutions like Goldman Sachs might be next in line for a fintech acquisition, but exactly which targets they will move on is yet to be seen.

"Historically, whenever we've seen transactions like this, they serve as a wake-up call to the existing legacy players," Aschettino said of the 2020 deals, adding that other companies will start saying, "Look what our competitors are doing. If we don't do something similar, we're going to be left behind."

The Evolution of Fintech M&A Deals

Consolidation in the payments space swept through the industry in 2019, with Global Payments Inc.'s $21.5 billion combination with Total System Services Inc., Fiserv Inc.'s $22 billion takeover of private equity-backed First Data Corp. and Fidelity National Information Services' purchase of Worldpay for $43 billion.

While 2019 saw fintech megamergers primarily in the payments space, 2020's early fintech deals, including the Credit Karma and E-Trade purchases, indicate that prospective buyers are training their sights on consumer-facing targets.

"As [digital] payments become ubiquitous, and consumers make more online payments, competing for the rest of their wallet online starts to happen more as well," said Matthew Jacobson, a Ropes & Gray M&A partner. "There is an evolution that is natural."

Nevertheless, Jacobson made a point to note that he doesn't think deals involving fintech payments companies are done by any means. Jacobson suspects the fintech mergers and acquisitions market will continue to evolve with the "expansion of services and the use of data."

"If you can capture more of the consumer and get permission to use the consumers' data, you can design new products, and so on," he said.

Whereas there is considerable hype around cryptocurrency and blockchain, Jacobson suggested that any major deals for players in that space may not come for a couple of years.

As for fintech companies, one of the major draws of being acquired by a large financial institution is undoubtedly the increased scale, according to Omarova.

"If a fintech company has a great product that it wants to sell, ... at some point it will bump against a limit on their ability to scale up their business and the cost for them of running that business," Omarova said.

Omarova also pointed to the significant benefits that fintechs could reap from being legally connected to a federally regulated bank, such as the safety nets of federal deposit insurance and discount window access at the Federal Reserve.

"The larger the business, the harder it is to run, the more expensive it is to run," Omarova added. "And that's where the access to public subsidy becomes critical. And public subsidy is only available to regulated financial institutions and their affiliates."

On the other side of the transactions, these large established institutions are seeking a new user experience and a new generation of users, Aschettino said. By acquiring fintech companies, legacy institutions embrace new technologies, participate in new revenue streams and absorb companies that have long been seen as threats to their existing business models, he added.

Potential Headwinds

Whereas the outlook for fintech deals is positive overall, the global economy faces some macro-level headwinds that could impact fintech mergers and acquisitions, including the effect of the coronavirus outbreak on the global supply chain and overall economic sentiment.

Jacobson noted that the virus and the upcoming U.S. presidential election may add some uncertainty as to whether the fintech deal boom will continue at pace.

The impact of coronavirus has largely halted mergers and acquisitions activity and slowed public offerings in China and its adjoining regions, but that chill could spread to cross-border transactions beyond Southeast Asia if the outbreak continues.

China-focused mergers and acquisitions activity is down more than 20% from last year, while proceeds have plummeted by more than half, according to research firm Dealogic. Initial public offerings in China are actually up from last year, though much of that activity occurred in early January before the severity of the outbreak was widely known.

Uncertainty over the extent of the outbreak and its full macroeconomic impact, which could make it harder for market players to determine valuations, is compounding problems.

While Jacobson doesn't think the 2020 deals so far will trip any regulatory wires, he suggested that in the years to come, as the economy becomes increasingly cross-border, oversight from the Committee on Foreign Investment in the United States may increase for fintech deals.

--Additional reporting by Chelsea Naso and Tom Zanki. Editing by Breda Lund and Michael Watanabe.

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