May ended with the announcement of yet another fintech megadeal: Global Payments Inc.'s $22.15 billion planned acquisition of Total System Services Inc.
It was the second-largest announced merger of the year after the industry saw its largest-ever fintech deal, Fidelity National Information Services Inc.s $35.36 billion bid for Worldpay Inc., announced in March.
With four deals valued above $10 billion so far this year, the industry aggregate deal value in 2019 as of May 31 has soared to $97.53 billion, more than twice the aggregate of the same period last year. However, the industry has seen only 119 deals in 2019 as of May 31, compared to the 167 deals in the same period in 2018.
Though private equity has headlined some of the largest fintech deals in recent years, strategic acquisitions are outpacing buyouts in 2019 in terms of deal value. Almost half of the largest fintech deals in 2018 were done by private equity, which has large amounts of dry powder to deploy. Private equity did claim one of the largest deals of 2019, a Hellman & Friedman LLC-led investor group's $10.97 billion purchase of The Ultimate Software Group Inc., a global provider of cloud-based human capital management services.
Strategic acquisitions, and even smaller tuck-in purchases, can help fintech companies round out their solutions, as they are increasingly looking to provide a full end-to-end offering. The Fiserv Inc./First Data Corp. and Fidelity National/Worldpay tie-ups have sparked consolidation among competitors.
For the core processors, Wolfe Research analyst Darrin Peller expects continued interest in three areas: issuer processing, capital markets assets and loan origination services. More broadly, Greg Peterson, a partner at PwC leading several private equity client teams, expects payments to continue to see significant consolidation.
"People are searching for synergies, and frankly, a number of the synergistic opportunities are to take current spend on [research and development] and focus it on more technology solutions," Peterson said in an interview. "The economies of scale that come out of these transactions will allow people to direct their investment in an appropriate way."
Deloitte highlighted cognitive and robotics technologies, digital lending, financial media and data solutions, and payment processing as highly sought-after segments in a recent fintech M&A report. As the fintech startups evolve into mature institutions, their M&A activity focuses on "rounding out" end-to-end services, the report said.
Markets pulled back in the fourth quarter of 2018, which contributed to multiples falling into the 10x to 12x range, said Greg McGahan, partner in PwC's deals practice. In comparison, he called 2018 a "feeding frenzy," with companies willing to pay multiples in the 12x to 14x range. As valuations start to come down, there will be more opportunity for companies to find new assets at more reasonable prices, McGahan said.
Though valuations are "reasonable," companies looking to acquire will have to pay "a healthy premium," Wolfe's Peller said. That is because the companies being acquired know they have a strong runway for growth and do not need a buyout to generate value, he said. Peller expects larger players to target companies that focus on business-to-business payments, automated clearinghouse capabilities and cross-border solutions.
Those acquisitions are likely to come from a wide range of geographies, particularly as the dollar strengthens, industry experts said.
PwC had seen more interest in global deals at the end of 2018 and into the new year, Peterson said, and every company needs to be ready to engage in a potential transaction.
But Peller cautioned that publicly traded European assets of significant size and scale are relatively rare.
The ones that do exist have "pretty high valuations, so it might be a little bit prohibitive for some companies we cover," he said. "But I certainly think it's on the radar of the merchant acquirers that we cover."
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