In the Capital Markets segment, an increased appetite for technology spending at financial institutions is presenting vendors with good pipelines and an increased array of legacy tech sellers. In addition regulatory pressures are requiring more transparency pertaining to risk assessment and valuation methods.
While it took this sector the longest to recover from the financial crisis, buyers are piling in now and driving up prices. We’re also seeing an increased number of software providers who have a recurring revenue business model. Whether developed initially or through transition, these companies are well positioned to take advantage of the financial industry’s willingness to accept cloud solutions in contrast to years of insisting on behind the firewall deployments.
Meanwhile, the Payments segment historically had many license-and-maintenance legacy business models, which are good, but not always the most attractive to buyers. Today, companies prefer subscription based business models. Moreover, as companies continue to pursue electronic bill payment and online payments to eliminate paper bills, the payments sector may see more mergers in that space in the future.
Data analytics is another attractive and growing field in payments for buyers as they seek to harness vital customer and transaction data and repackage it for marketing and sales purposes. Payments companies want to offer more intelligence to their customers.
In terms of the Banking segment, new database technologies are improving the ability of debt servicers to assemble disparate pieces of information about consumers, making it easier and more cost-efficient to locate and contact them. Mortgage servicers are also experiencing greater demand for more targeted and frequent borrower communication, including email, text messaging and more complex print and mail offerings.
Innovations have aided lenders and debt servicers in the ability to obtain, store and transfer data about consumers and their debts. When licensing technology or subscribing to third-party technology is not an option, outsourcing business processes has become a viable solution and growing trend as well.
Current M&A Market Landscape
Transaction volume experienced a 14 percent increase over the past year. Aggregate value more than doubled, from $27.81 billion to $63.78 billion. FIS’ acquisition of financial software company SunGard Data Systems for $9.1 billion in 2015 was the industry’s largest deal since 2012, when Intercontinental Exchange acquired NYSE Euronext for $10.18 billion.
Strategic buyers accounted for 80 percent of volume in 2015, which was nearly constant relative to 2014.
- Eight of the industry’s top ten largest deals in 2015 were completed by strategic acquirers.
Financial sponsors accounted for 18 percent of value in 2015, compared to 43 percent in 2014.
- The overall industry’s most active acquirer in 2015, either directly or through an affiliated business, was Vista Equity Partners with six transactions. The largest of these was the announced acquisition of Solera Holdings in the property and casualty (P&C) sector for $6.25 billion.
Industry Wide Valuations
Enterprise value multiples over the past 24 months have been strong. The median revenue multiple during this timeframe was 3.1x, while the median EBITDA multiple was 12.6x.
M&A Analysis of the Past Two Years
Berkery Noyes recorded 805 financial technology and information industry merger and acquisition (M&A) transactions from the beginning of 2014 through the end of 2015. The median revenue multiple increased from 3.0x to 3.2x, while the median EBITDA multiple declined from 13.3x to 10.5x.
Mid-market transactions in the $10-$20 million range received a median revenue multiple of 2.4x. Deals above $160 million in enterprise value had a median revenue multiple of 4.7x. Of note, the median revenue multiple for deals in the Payments segment over the past two years trended well above those of the entire financial technology industry at 4.7x.
M&A Activity Per Industry Segment
Payments. The Payments segment, after rising 46 percent in 2014, saw volume decrease 21 percent in 2015. In terms of value, five of the industry’s top ten largest deals during the year occurred in the segment. The industry’s highest value transaction was Global Payments’ announced acquisition of Heartland Payment Systems, which offers payment processing services to merchants, as well as those in several vertical markets such as the education sector, for $4.31 billion. Regarding notable buyers, PayPal acquired Xoom Corporation, a digital money transfer provider, for $788 million; and Paydiant, a cloud-based payment processor, for $280 million. Meanwhile, the largest deal in the mobile subsector was Snapdeal’s acquisition of Freecharge, a mobile commerce platform that gives users coupons for adding money to prepaid mobile plans and paying bills online, for $379 million.
Capital Markets. As for the Capital Markets segment, volume increased 42 percent over the past year, making it the sector with the largest yearly gain. Big data is increasing the demands on trading, modeling, executing, and portfolio management. Likewise the variety of risk profiling and stress testing that financial institutions will be subjected to requires more analytical capabilities.
Intercontinental Exchange was responsible for two of the segment’s top ten highest value deals during the year with the acquisition of Interactive Data Corporation, a provider of financial market data and analytics, for $7.45 billion; and Trayport, which offers energy trading solutions to traders, brokers and exchanges, for $646 million. Deutsche Börse Group’s also made two notable acquisitions with 360T, a provider of web-based trading technology, for $796 million; and joint ventures STOXX and Indexium, two European-based index groups, from SIX Group for $701 million.
Other notable Capital Markets deals in 2015 included SS&C Technologies’ acquisition of Advent Software, a provider of portfolio management and accounting systems software, for $2.55 billion; Bridgepoint’s acquisition of eFront SA, which offers software solutions focused on alternative investments and risk management, for $327 million; and Temenos Group’s acquisition of Multifonds, a fund administration software company, for $260 million.
Banking. Acquisition activity in the Banking segment increased 35 percent, from 62 to 85 deals. The largest Banking transaction in 2015 was Diebold’s announced acquisition of Wincor Nixdorf, a provider of IT solutions and services to banks and the retail sector, for $1.8 billion. Diebold, which focuses on automated teller machines and financial software, has a strong presence in the Americas, whereas Wincor Nixdorf is well established in Europe. Other notable segment deals in 2015 included Envestnet’s acquisition of Yodlee, a financial data aggregator and provider of online financial tools, for $590 million; and SS&C’s acquisition of Primatics Financial, an accounting, forecasting, regulatory reporting, reserving and stress testing solutions company, for $122 million.
Insurance. Transaction volume in the Insurance segment increased 22 percent, from 51 to 62 transactions. The largest Insurance related deal in 2015 was Vista Equity Partners’ acquisition of Solera Holdings for $6.25 billion. Solera provides risk management software to the automotive and property marketplace, including the property and casualty (P&C) insurance sector.
Throughout the financial technology industry, resources are being dedicated to identify gaps in existing infrastructure architectures, consolidate multiple reporting systems, and better assess existing client data. There has also been an impetus to manage cyber vulnerabilities, which is an area that is ripe for substantial technology investment. At the same time, banks and credit unions are encountering a new regulatory framework, in which improved technology and automated solutions are increasingly necessary to maintain compliance. The greater focus on enforcement is encouraging financial institutions to become more proactive in meeting regulatory mandates.
About Berkery Noyes
Founded in 1980, Berkery Noyes is an independent investment bank that provides M&A advisory and financial consulting services to middle market companies in the information and technology industries.
The firm offers skilled transaction management to publicly traded and privately held businesses and private equity groups in both sell-side and buy-side transactions. Berkery Noyes has managed over 500 transactions, ranging from several million to more than four billion dollars in value.