2019-04-02 An Overview of M&A in the Financial Technology and Information Industry

The growth of electronic trading has driven investor demand for access to multiple asset classes, lower trading costs, and improved analytics and data management. This has prompted financial services and diversified banking investment in innovative new alternative investment platforms to meet these demands. Moreover, top-tier companies in the financial services and diversified banking sectors are either sitting on considerable cash holdings or have designated investment arms with the sole purpose to invest and partner with innovative companies to diversify their product offerings and stay ahead of the latest trends in technology and finance.

As for the banking segment, the ability to offer a universal product to lenders and servicers, as well as to the secondary markets, is a trend that is rapidly gaining momentum. 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 valuable investments. The most attractive targets to that end include automated valuation model providers, broker price opinion providers, property data solutions, and appraisal management companies (AMCs). All of these sectors are active areas where we expect to see even more M&A activity in the near future.

Meanwhile, credit unions and banks, realizing the advantage of a recurring payment system, are utilizing automatic e-bills and online banking services to generate sustained revenue from their payments business. Consumers who regularly use e-billing services tend to have higher satisfaction rates and more prompt repayment schedules. This is important as financial institutions deal with heightened competition from third party payment providers. Each of these factors bodes well for M&A in the electronic bill payment & presentment (EBPP) sector.

In an increasingly interconnected global economy, commercial cross-border revenue is rising and the need for payment solutions like virtual prepaid services for international commerce is becoming more widespread. The total accessible market operations open to third party providers has also risen due to pressure put on incumbent consumer credit providers by regulatory action. Key business problems to be solved include fraud detection and elimination, utilization of multiple payment methods, and the aggregation of as many customer streams as possible.

The governance, risk, and compliance (GRC) marketplace as a whole is also very active at the moment. Many acquirers are showing a strong interest in GRC vendors that help create consistent processes for risk assessment. The focus is on integrating technology and content across business functions, rather than relying on ad-hoc or fragmented corporate compliance systems.

Current M&A Market Landscape

Transaction volume increased 15 percent over the past year, from 448 to 515. Aggregate value gained 12 percent, from $43.29 billion to $48.57 billion.

Strategic Buyers

• Strategic volume improved 13 percent on an annual basis, from 342 to 387 deals. Strategic acquirers represented 76 percent of aggregate volume and 65 percent of value in 2018.

Financial Sponsors

• Private equity backed volume increased 21 percent year-over-year, from 106 to 128 deals.

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 14.8x.

M&A Analysis of the Past Two Years

Berkery Noyes recorded 963 financial technology and information industry merger and acquisition (M&A) transactions from the beginning of 2017 through the end of 2018. The median revenue multiple rose from 2.8x to 3.1x during this period.

Transactions in the $10-$20 million range received a median revenue multiple of 1.3x, compared to 1.9x for those in the $20-$80 million range and 4.0x 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 24 percent over the past year. Of note, eight of the overall industry’s top ten highest value transactions during 2018 occurred in the Capital Markets segment. SS&C Technologies was a notable segment acquirer with three of these eight deals: DST Systems, a provider of specialized technology, strategic advisory, and business operations outsourcing, for $5.64 billion; Intralinks Holdings, which offers secure data sharing and enterprise collaboration solutions that are used by the banking and capital markets sectors, for $1.5 billion; and Eze Software, an investment management software solutions company, for $1.45 billion.

Additional high profile Capital Markets deals in 2018 included a Blackstone Group led consortium’s acquisition of a 55 percent stake in Thomson Reuters’ Financial & Risk division for $11 billion; and State Street Corporation’s acquisition of Charles River Systems, a provider of investment management front office tools and solutions, for $2.6 billion; and IHS Markit’s acquisition of Ipreo Holdings, which offers financial market information and software with a focus on alternative assets, for $1.86 billion.

• Payments. Deal activity in the Payments segment gained 16 percent from 2017 to 2018. PayPal completed two high profile segment transactions in 2018 with the acquisition of iZettle, a mobile payments company that offers small businesses with portable point-of-sale solutions, for $2.43 billion; and Hyperwallet, a digital payout provider aimed at the sharing and gig economies, for $400 million.

Other high profile segment transactions in 2018 included SilverLake and P2 Capital Partners’ acquisition of Blackhawk Network, a physical and digital gift card and prepaid payments network, for $3.62 billion; Edenred’s announced acquisition of Corporate Spending Innovations, which offers automated corporate payment software, for $600 million; GrubHub’s acquisition of LevelUp, an analytics, loyalty, and rewards-based mobile platform that connects restaurants and guests, for $390 million; and Visa’s acquisition of Fraedom, which provides payments and transaction management solutions for financial institutions and their corporate customers, for $200 million.

• Banking. There was a five percent uptick in the Banking segment, from 104 to 109 transactions. Notable Banking deals during 2018 included News Corp subsidiary Move’s acquisition of Opcity, a real estate lead generation technology platform that matches buyers and sellers with real estate agents, for $210 million; and Q2 Software’s acquisition of Cloud Lending, an integrated platform for consumer, commercial, small business, construction, and equipment leasing, for $105 million.

• GRC. Regarding the industry’s broad-based GRC sector, notable deals over the past year included the management buyout of Asset Control, a provider of financial data management software to banks and other financial institutions, which was backed by Sovereign Capital Partners; OnCourse Learning’s acquisition of Total Training Solutions, a provider of educational training webinars for banks, credit unions and mortgage lenders; Moody’s acquisition of Omega Performance, an online credit training company used by financial services organizations; Prime Trust’s acquisition of FundAmerica, which builds SEC-compliant solutions for technology-based securities offerings; and Equifax’s acquisition of DataX, a credit reporting agency (CRA) and alternative data provider.

Conclusion

Acquirers are looking for products to round-out their solutions suite and to gain customers and market share. 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.

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.