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Surging fintech demand drives tech M&A activity in August

Information technology M&A deal volume was depressed again in August, but it was definitively a month of recovery.

There were 20.4% fewer deals announced in the sector in August compared to the same month in the prior year. However, August 2019 was a tough comparison, up 12.7% over the prior year, and the current-year month saw the sector's second-largest deal announcement of the year — Thoma Bravo LLC's sale of Ellie Mae Inc. to Intercontinental Exchange, Inc. for $11.02 billion.

The transaction comes about a year and a half after Thoma Bravo acquired Ellie Mae for just $3.61 billion and put the company under its $12.6 billion Thoma Bravo Fund XIII LP.

A financial technology firm, Ellie Mae provides a range of software, cloud and app-based tools to service the mortgage finance industry. It collected $480.3 million in total revenue in 2018, and ICE executives are accounting for $900 million in 2020 pro forma revenue, ICE CEO Jeffrey Sprecher said on an Aug. 6 investor call outlining the transaction.

The deal comes as financial technology valuations are soaring. The banking, payments, securities and insurance sectors have been undergoing a digitization and automation trend for some time, but the COVID-19 pandemic and shelter-at-home guidelines have pressured banks to increase their focus on software solutions.

"The fintechs that are serving banks, like nCino, Ellie Mae and Black Knight are in a much better position right now," Sam Kilmer, senior director at Cornerstone Advisors, said in a recent interview with S&P Global Market Intelligence.

Ellie Mae represents ICE's largest transaction to date. Operator of the New York Stock Exchange, ICE will advance its expertise in electronic securities trading to the mortgage marketplace. That M&A strategy began in 2018 with the acquisition of MERS System and continued through the acquisition of Simplifile LC. The addition of Ellie Mae provides customer-facing software tools to ICE's already robust back-end solutions and data. About 44% of all mortgages in the U.S. were originated through Ellie Mae's platform.

"The U.S. residential mortgage market is experiencing an analog-to-digital conversion," Sprecher said in 2019 following the Simplifile deal announcement. "It's an evolution that we've seen before, and much like in other asset classes, we're providing products, services and key infrastructure aimed at facilitating that transformation."

Sprecher also justified the high price tag by noting Thoma Bravo's positioning of Ellie Mae as a cloud-focused firm. The combination will allow ICE to provide certain data tools to clients on a real-time basis that its competitors provide with a 90-day lag time, the CEO said.

Adviser fees for the transaction were not disclosed, but JPMorgan Chase & Co. could stand to add to its trend-bucking 2020 adviser revenue. In a comparable transaction, J.P. Morgan in February signed up for a record fee of $81.0 million on its work with E*TRADE Financial Corp. on its $13.83 billion sale to Morgan Stanley. The adviser collected $10 million of that sum on a fairness opinion, and the remaining $71 million will be contingent on the deal closing. However, the fee amount will likely change by the time the transaction closes as it is an all-stock deal and the fee is subject to market fluctuations.

J.P. Morgan consulted both Ellie Mae and Thoma Bravo on the ICE transaction. This would not be the first time that firm worked with both companies. It advised Ellie Mae on its sale to Thoma Bravo in 2019, a much smaller transaction for which J.P. Morgan collected $37.0 million in adviser fees.

A J.P. Morgan advisory unit collected on another insurance technology transaction announced in August. The second largest deal of the month, Roper Technologies Inc. picked up Project Viking Holdings Inc. for $5.35 billion. The J.P. Morgan unit worked with the buyer on that transaction, but it did not disclose fees.

Project Viking will represent an early foray into the insurance industry for Roper. Roper, which carried a market capitalization of $46.77 billion a day prior to the deal announcement, offers a range of products and services, including management software for industries ranging from education to laboratory to infrastructure, and it also engineers various industrial products.

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