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Fintech M&A sees smaller deals in 2016

During 2016, the fintech industry saw fewer megadeals than in 2015.

In 2016, there have been 178 announced transactions classified by SNL as financial technology deals with U.S. targets. That total is down from 201 a year earlier. The aggregate disclosed deal value dropped to approximately $17.47 billion from $48.42 billion in 2015.

During 2016, the most notable deals included Quintiles IMS Holdings Inc.'s acquisition of IMS Health Holdings Inc. in an approximately $9.0 billion transaction and Total System Services Inc.'s acquisition of TransFirst Holdings Corp. for $2.35 billion. They were the only two deals with announced values above $1 billion this year, whereas there were more than 10 such deals in 2015.

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"I don't think anyone would argue that, anecdotally, there is sort of a lack of activity in the space. But if you look over the past several years, I think you will find a definite growth trend," said Christopher Pedone, director at Freeman & Co. LLC. He thinks the activity in 2015 spiked enough that it caused 2016 to show a dip in the M&A activity. "That might just be that. Can't grow every single year," Pedone added.

Pedone also noted that since there were a lot of deals in 2016 with undisclosed financial terms, that could have driven a dip in the year-over-year aggregate deal value. He noted that smaller companies in deals don't tend to disclose financial terms.

"I think after the wave of consolidation, it might have just gotten a bit quieter from an M&A perspective," said Dan Dolev, an analyst at Nomura. "But, I expect that companies with good solutions and very attractive customer bases are going to continue to be pursued," he added.

Ken Marlin, founder and managing partner of Marlin & Associates, believes that as long as the economy stays strong, deal activity in the fintech sector will also stay strong. "The only thing that could hold us back would be if the economy as a whole were to suffer a setback. But, short of that, we see a very strong M&A market in this industry," said Marlin.

Marlin also noted that the financial technology industry is taking advantage of new technologies and capabilities such as cloud computing and blockchain. He thinks the "revolution" in the fintech space is fostered by consumers' demand, an increased willingness to rely on third-party vendors, and regulators who are pushing for increased transparency and security.

"It all adds up to an industry that is attracting new participants and at the same time coalescing around themes. It also leads to an M&A market environment that is likely to stay very active for a long time, as long as the economy as a whole remains strong," Marlin added.

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Pedone added that a lot of money is coming into the sector and a "disproportionate" amount of funds are sourced through private equity and venture capital firms. He said those firms typically make up 15% to 20% of the deal activity in the financial services sector as a whole. However, their involvement is "somewhere between a third and a half, depending on the time period" in the fintech sector.

According to SNL data, large private equity deals in the year included the acquisition of Epiq Systems Inc. by an investor group composed of Toronto-based OMERS Private Equity and New York-based Harvest Partners LP, in a $630.3 million deal; and Thoma Bravo LLC's acquisition of Imprivata Inc. in a $543.8 million deal.

Banks also seemed active in the sector during 2016. Among the top 20 fintech M&A deals in 2016 ranked by deal value, banks participated in five deals worth approximately $455 million in total. The most notable bank/fintech deals included Community Bank System Inc.'s pending acquisition of Northeast Retirement Services Inc. in a $131.7 million transaction and Jacksonville, Fla.-based Fidelity National Financial Inc.'s five fintech purchases, including the acquisition of eLynx Ltd. in a $126.2 million deal.