Financial technology companies' price tags have swelled this year as the industry continues to mature and legacy institutions turn more to technology.
Although the number of fintech deals with U.S. targets has ranged between 5 and 20 per month since August 2017, deal values largely picked up in mid-2018, according to an S&P Global Market Intelligence analysis.
But analysts warned that these high valuations could price out some buyers. D.A. Davidson analyst Peter Heckmann said some deals have not happened because seller expectations were "too high," and Credit Suisse analyst Paul Condra said valuations have "peaked."
The current combination of strong macroeconomic conditions, a "significant amount" of available capital and more favorable views of going public have led to higher valuations during buyout talks, said Spencer Johnson, a partner at corporate law firm King & Spalding.
"Buyers in that sale process have to compete with the potential that the company actually goes public," Johnson said in an interview. "For a long time ... that was an empty threat."
The two largest deals in the sector so far in 2018 have been private equity buyouts: a Blackstone Group LP-led investor group's carve-out of Thomson Reuters Corp.'s financial and risk business for $17.3 billion and another group's acquisition of Dun & Bradstreet Corp.
But many deals have been strategic moves to add one fintech company's products or capabilities to the buyer's suite.
"You're less likely to purchase a company that does exactly what you do, and more likely to look for new technology or [a] strategic, adjacent product that you can acquire your way into, or move into a new geography," Condra said in an interview.
PayPal Holdings Inc., for example, has recently completed smaller purchases outside the payments space, including deals for information technology company TIO Networks Corp., specialty finance company Swift Financial Corp. and internet software companies Jetlore Inc. and Simility Inc.
Industry experts pinpointed payments as one of the most active fintech sectors for M&A. The latest wave of deals continues two decades of consolidation in the industry, Heckmann said in an interview, noting that deals facilitating e-commerce or mobile payments are currently attractive.
Payments companies are a "hot commodity," and scale increasingly matters in that sector, King & Spalding's Johnson said. "From an acquisition standpoint, the more customer relationships that you can put under one umbrella, the more efficient the business ultimately becomes from an operation standpoint."
Several of the largest fintech deals of 2018 to date have involved a U.S.-based buyer and a foreign target, including PayPal's pending $2.2 billion bid for Sweden-based iZettle AB and Vantiv Inc.'s $12 billion acquisition of London-based Worldpay Group PLC, a deal that formed Worldpay Inc. after the merger was completed in January. PayPal executives in particular noted that the company plans to pursue several deals valued between $1 billion and $3 billion in each of the next several years.
Credit Suisse's Condra expects valuations to remain stable in the back half of 2018, but warned that there might not be support for as many deals. On the other hand, King & Spalding's Johnson believes there will be "a lot of people running to get deals done" through the end of 2018.
"As long as the economy continues to perform on a macro basis, people will continue to make investments, and we can expect this to spill over into 2019 as well," Johnson said.