2020-04-01 An Overview of M&A in the Financial Technology and Information Industry

Private equity firms as well as strategics that are looking to extend their product offerings are showing a high level of interest in this expanding and rapidly changing market. End-users of financial technology solutions in general are often diverse, global, and well capitalized institutions with significant IT spend at their disposal. A sizable number are actively seeking tools that drive alpha, reduce costs, or assist in compliance. The return on investment for financial technology and information customers can be high, encouraging users to view these technologies as not only productivity solutions but also profit generators.

With the emergence of the COVID-19 pandemic, certain sectors in the financial technology industry may be poised for growth. As an example, some have argued over the past several years that mobile payments alone might not provide a value-added service for consumers. This has changed as the vulnerabilities of cash have come more into focus. Beyond mere convenience, mobile payments avoid the potential health concerns around handling paper bills, which are exchanged frequently, or the need to use ATMs and touchscreens. Companies that can integrate a full range of products with their mobile payments platform provide a compelling reason for both consumers and merchants to adopt the technology.

Security also remains a major area to address for many players in the space. Although credit card companies and merchants have measures in place to reduce fraud related risk, they are attempting to refrain from overly complicating the consumer transaction experience in order to prevent the frustration that leads to lower sales volume. With this challenge in mind, there is great opportunity for companies who provide discreet and effective fraud-detection technology. For card providers and merchants, the possession of secure and streamlined technology should provide a competitive edge.

As for the real estate market, agents and other professionals are looking for tools that will give them a competitive advantage over their rivals, whether it’s by better targeting and reaching more prospects, shortening the sales cycle process, or communicating more effectively with clients. Moreover, there is innovation occurring in quite a few areas, as seen by the plethora of companies that provide predictive marketing analytics, CRM solutions, virtual property viewing services, broker-free search engines, and technology-enabled property and lease management brokerages.

The mortgage sector is also undergoing consolidation. In particular, acquirers are embracing tactical acquisitions of appraisal firms to capture customers and increase market share. Because a primary goal for many large vendors is to create end-to-end solutions, mortgage technology platforms that add to existing overall systems and help the acquirer create critical mass are some of the most sought after investments.

Current M&A Market Landscape

Transaction volume increased ten percent over the past year, from 513 to 564. Aggregate value more than tripled, from $49.32 billion to $180.86 billion. Of note, there were five deals with disclosed values above $20 billion in 2019, compared to none in 2018.

Strategic Buyers

• Strategic volume improved 14 percent on an annual basis, from 386 to 440 deals. Strategic acquirers accounted for 77 percent of volume and 87 percent of value from 2018 to 2019.

Financial Sponsors

• Private equity backed volume saw a two percent decline year-over-year, from 127 to 124 deals. Financial sponsors represented 23 percent of volume and 13 percent of value from 2018 to 2019.

Industry Wide Valuations

Enterprise value multiples over the past 24 months have been strong. The median revenue multiple during this timeframe was 3.0x, while the median EBITDA multiple was 13.8x.

M&A Analysis of the Past Two Years

Berkery Noyes recorded 1,077 financial technology and information industry merger and acquisition (M&A) transactions from the beginning of 2018 through the end of 2019. The median revenue multiple shifted slightly from 3.0x to 2.9x during this time period.

Transactions in the $10-$20 million range received a median revenue multiple of 1.1x, compared to 2.4x for those in the $20-$80 million range and 4.4x for those in the $80 million and above range.

M&A Activity Per Industry Segment

• Capital Markets. M&A volume in the Capital Markets segment increased nine percent over the past year. Three of the overall industry’s top ten highest value transactions during 2019 occurred in the Capital Markets segment. This consisted of Thomson Reuters and Blackstone’s sale of Refinitiv, a financial data analytics provider, to the London Stock Exchange for $27 billion; Charles Schwab’s announced acquisition of TD Ameritrade, a broker that offers an electronic trading platform, for $26 billion; and BlackRock’s acquisition of eFront, an alternative investment management software and solutions provider, for $1.3 billion.

Other high profile Capital Markets transactions included Ant Financial’s announced acquisition of WorldFirst, a money transfer and currency exchange firm, for $700 million; Vista Equity Partners’ acquisition of AltaReturn, which provides software for fund accounting, portfolio management, business intelligence, CRM, investor portal and reporting, for $500 million; Envestnet’s acquisition of PIEtech, the creator of the MoneyGuide family of financial planning applications, for $500 million; and Verisk’s announced acquisition of Genscape, a global provider of real-time data and intelligence for commodity and energy markets, for $364 million.

• Payments. Deal activity in the Payments segment gained 18 percent from 2018 to 2019. In terms of value, four of the overall industry’s top ten largest transactions during 2019 occurred in the Payments segment.

Along these lines were FIS’s merger with Worldpay Group for $42.87 billion (this was the highest value deal ever recorded in the industry by Berkery Noyes); Global Payments’ announced acquisition of TSYS, which offers credit card processing and other services, for $26.06 billion; Fiserv’s acquisition of First Data Corporation, a payment processing company, for $22 billion; and Mastercard’s announced acquisition of the corporate services business from Nets Holding A/S, which facilitates the exchange of digital payments for banks, businesses, merchants, and consumers, for $3.19 billion.

• Banking. The Banking segment underwent a five percent rise in volume. Notable Banking deals during 2019 included Thoma Bravo’s acquisition of Ellie Mae, a cloud-based platform provider that serves the residential mortgage sector, for $3.3 billion; Temenos Group’s acquisition of Kony, a provider of digital banking software, for $559 million; and Q2 Software’s acquisition of PrecisionLender, which offers a sales, negotiation, and coaching platform for bankers, for $510 million.

• GRC. Regarding the industry’s broad-based GRC sector, volume improved 26 percent. Notable GRC deals over the past year included FICO’s acquisition of EZMCOM, a security access provider that protects users from credential theft, account takeovers, and breaches; Data Facts’ acquisition of Strategic Information Resources, a national provider of risk assessment services such as consumer and business credit reports, appraisals, and comprehensive background screening; Moody’s acquisition of RiskFirst, which offers risk analytic solutions for the asset management and pension fund communities; and Bloomberg’s acquisition of RegTek.Solutions, a provider of global regulatory reporting software solutions.

Conclusion

The M&A outlook in the financial technology industry remains robust as strategic acquirers seek innovative solutions to fill certain voids and maintain their competitive advantage. Amongst a diverse set of players, many legacy institutions want to acquire companies that could pose an eventual threat to their business models. Meanwhile, financial sponsors are deploying their capital at high levels.

As for some prominent trends in the space, 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 investment.

About Berkery Noyes

Founded in 1980, Berkery Noyes is an independent investment bank that provides M&A advisory to middle market companies in the information, software, services, 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.