A new report seeks to “take the temperature” of the mergers and acquisitions activity in fintech, looking at input from 100 senior executives from banks, asset managers, fintech businesses, PE and VC firms active in this space. There are a lot of potential acquirers, along with some who may have ancillary roles in the acquisitions and who may be the target.
The report, by Boston-based law firm Ropes & Gray, which represents many hedge fund, asset management, and private equity clients, concludes that activity in this area has accelerated, but that it has not yet peaked.
Ninety-two percent of all the respondents to Ropes’ questions said that even after significant increases in recent years, the number of deals will increase again next year. A more modest majority (55%) of the banks and other financial institutions asked, say that they expect to close three or more fintech M&As next year, while 86% of all respondents say that fintech deal premiums are higher than are premia in non-fintech M&As.
The fintech field has long faced what the report calls “cultural and legacy system challenges.” That is, financial institutions are quite commonly content with the technology they have in place, and are in no rush to update it, especially where that would make the previous round(s) of tech investments obsolete. It is the new entrants who challenge older firms in particular markets, without the burden of legacy systems. The success of those new entrants often forces the established firms to play self-defensive catch up.
But there have been many new entrants, and are having, a catalyzing effect. Every bank or financial institution contacted says that it has purchased or commissioned a fintech product and or service within the past two years. Obviously, purchasing a product is distinct from buying the company that sells it and bringing something in-house. But the 100% number is an extraordinary one and shows how dynamic the market is.
Because of that dynamic, 57% of banks and other financial institutions say that transforming their business model and addressing industry disruption are leading drivers for their next fintech acquisition. Nearly three quarters (72%) of such institutions say they expect to purchase a fintech company within the next two years.
Another issue to which the report alludes is valuation. If a larger firm wants to acquire a smaller fintech firm, how does it know what is a fair price? How does you establish asset values in such a fast-moving field? An impressive 61% of the financial institutions asked about this have described that as “very difficult.” An even larger number (67%) of PE and VC investors say that it is very difficult for them to conduct due diligence on the intellectual property of the targets.
What “Fintech” Means
“Fintech,” of course, names a large and heterogeneous field of technology. Ropes & Gray defines it as the acquisition of a target that can “advance the technological capacity of a financial department or institution.” In deciding whether a deal counts as “fintech” for the purpose of their study, the folks at Ropes & Gray limited the field to deals where the “main driver was related to advancing or expanding the buyer’s technological capacity within the area of finance,” excluding deals where this might be only a “minor element of the deal.”
Ropes & Gray relied on the database of Mergermarket, a media company that provides specialized deal news. According to Mergermarket’s database, more than 1,375 fintech deals closed between 2010 and 2018, with a total disclosed value above $200 billion. The dealing has accelerated: five times more deals got done in 2018 as in 2010.
Some subfields within the world of fintech have created more excitement than others. Online/mobile payments technology by itself accounts for 17% of the deals done in 2018. That makes it the largest part of the whole: investment and wealth management tech is second, and back or middle-office tech is third.
Watch Out for the Robots
The report tells us that advances in certain expense-containment areas, such as robo-advice, “now offer a means for many in financial services to tap into a growing millennial customer base, and to extend their reach beyond the wealthiest customer segments paying for bespoke, face-to-face counsel.”