Merger and acquisition (M&A) values surpassed the record highs set in 2015 (UDD 3.96 trillion) and 2007 (USD 3.67 trillion), pushing businesses to accelerate their due diligence procedures for the majority of the last two years. However, after the pace of dealmaking slowed down in late 2022, the emphasis is currently on how quickly a deal can produce the expected returns.
Although 2022 was the second-busiest year ever for M&A activity, coming in at 1,270 deals overall, just behind 2021 (1,485), the volume of fintech M&A only managed to reach USD 129.6, the lowest level since 2017.
Fintech M&A activity began to decline significantly in the second quarter of 2022. Global investments were falling 33% from quarter to quarter, to their lowest levels since 2020. Moreover, there was a significant drop in deal volume as well.
The fintech sector, like the rest of the M&A industry, has been impacted by the general economic and investment uncertainty brought on by rising inflation and interest rates as well as mounting concern over the political and economic climate. Therefore, for the first time since 2018, there was no fourth-quarter increase in M&A activity to cap off the year. The amount of global M&A deals dropped even more in Q4 2022 (USD 719 billion) compared to the startlingly low deal volume in Q3 2022 (USD 735 billion).
Companies must adapt to rapidly changing industries in order to survive. This is the reason businesses are constantly looking to acquire other enterprises that can provide them with cutting-edge technology and knowledge. Nowadays, businesses are looking to expand quickly through acquisitions. Therefore, there is a high interest in platform businesses that have a large customer base but are still trying to figure out how to monetise it.
Curve's acquisition of BlockFi's more than 87,000 credit card users, for instance, was motivated in part by this. If the purchase is successful, the fintech hopes to keep BlockFi's credit card program going. Customers from BlockFi's credit card programme won't be ported to another centrally held exchange, which is an additional advantage of a successful acquisition.
However, BlockFi is merely one of the numerous cryptocurrency businesses that were (partially) acquired, as having trouble raising capital made for simple acquisition targets. Negative press surrounding cryptocurrencies, especially after FTX's recent collapse, may have damaged investor confidence and slowed investment, but M&A activity was unaffected.
Furthermore, despite the fact that the number of payment deals fell by 14% to 113 in 2022 from 132 in 2021, the sector still produced one of the year's largest transactions: Thoma Bravo's agreement to purchase privately held expense management player Coupa Software for USD 8 billion.
Undoubtedly, 2022 was a difficult year for the crypto industry. However, despite ongoing market volatility, it continues to be a fertile ground seeing as consumer demand for digital assets is still high.
There has already been some market activity as a result of the wave of insolvencies that emerged in the second half of the year. In December, for example, Binance.US agreed to pay USD 20 million to acquire Voyager Digital's customer accounts plus the market value of its crypto assets, which at the time of the announcement was approximately USD 1 billion.
For crypto natives to purchase assets out of bankruptcy, as in the aforementioned instance, there are three main reasons. One is customer expansion, as demonstrated by the agreement between Binance.US and Voyager. Investing in human capital and technological infrastructure is another option. The regulatory framework, licences, and authorisations of a failed target may also be attractive to potential buyers.
This deal aims to expand the user base of Binance.US while giving Voyager's customers access to a cryptocurrency-based recovery and liquidity, though there is no guarantee that the sale will receive regulatory approval.
However, this was not Binance's only M&A move: in the same month, the company also paid undisclosed amounts to acquire Tokocrypto and Sakura Exchange BitCoin. Given that SEBC is a JFSA-registered cryptocurrency exchange, these are both investments in the business's expansion throughout Asia.
The agreement by Bakkt to purchase Apex Crypto for USD 200 million was another significant transaction. In this case, the aim is to increase the range of cryptocurrency products that Bakkt offers and strengthen relationships with new client segments like fintechs, trading app platforms, and neobanks. The Apex Crypto platform also supports a comprehensive user experience while handling any regulatory and licensing requirements related to cryptocurrency investing.
Almost every middle-market bank in the sector is seeking to acquire or to be acquired. Many banks view an acquisition or merger as an opportunity to broaden their clientele or accelerate the growth of their business.
However, statistics indicates that until November 2022, there were just 149 US bank mergers and acquisitions announced. That put the sector on track for 162 agreements in 2022, a significant drop from 206 the previous year. The downturn occurred at a time when US regulators were scrutinising industry consolidation more closely before approving large acquisitions.
Even so, some noteworthy contracts were signed in 2022. One of these transactions was the purchase of 100% of the issued common equity of HSBC Canada by Royal Bank of Canada for a base cash consideration of USD 10.1 billion. Additionally, for about USD 0.8 billion and USD 0.7 billion, respectively, RBC will purchase all outstanding preferred shares and subordinated debt issued by HSBC Canada and owned by the HSBC Group. The deal is anticipated to close in late 2023.
Moreover, in order to enter the US market, Taichung Commercial Bank decided to purchase American Continental Bank for USD 82 million. The decision of Taichung Commercial Bank coincides with increased military hostilities between Taiwan and mainland China in 2022. Some of the biggest technology businesses in the world are based in Taiwan, and Washington has urged that country's chip industry to make investments in the US.
The level of corporate and geopolitical threats against key infrastructure may suggest cybersecurity firms should be valued more like defense stocks than like technology stocks. Nearly every new technical invention that contains sensitive data or communications requires a corresponding cybersecurity innovation to protect that data and innovation.
Small businesses that offer highly specialised and sophisticated goods to address certain cybersecurity needs are flooding the market to satisfy this rising demand, which is fueling an active M&A climate. New companies are formed at a rate that is hard to match by consolidation.
When examining Thoma Bravo's investment decisions for 2022, for example, it is evident that cybersecurity and fintech have received the majority of the investment company's capital. Both trends have many years of industry innovation and development ahead of them because they are secular growth tendencies. Remote labour and cloud-based access to digital systems were challenges for many firms that weren't prepared. Because of this, identity and access management have experienced rapid expansion in recent years. Thoma Bravo has recently acquired ForgeRock, so it's obvious that it wants a share of the action. (And don't forget about SailPoint and Ping Identity.)
Considering that over two-thirds of ecommerce transactions are platform-based, making markets a potential target for fraud, MANGOPAY’s decision to purchase Nethone was a natural step.
The move followed Advent International’s acquisition of MANGOPAY in April 2022, when it became the company’s new majority investor with the goal of furthering the MANGOPAY’s expansion and product offering. MANGOPAY and Nethone are now attempting to create a fraud protection system designed especially for platforms and marketplaces.
As consumer expectations and operational complexity rise, the rate of digital acceleration across industry sectors does not appear to be slowing down. Due to disruption from fintechs and non-FS organisations, technology capabilities continue to be a key component of corporate initiatives to strengthen market position.
In order to harness data, increase operational efficiencies, and quicken transaction processes, it was only natural for a significant portion of M&As to be capability-driven deals. With the aid of M&As, businesses can cut back on service outsourcing, allowing them to improve internal operations and control expenses. That might be especially crucial when facing financial distress. Additionally, product suites can be expanded through acquisitions, enabling businesses to service additional clients and increase income. This helps improve their value propositions in comparison to rivals.
Based on these justifications, it shouldn't come as a surprise that Worldline decided to buy a 55% stake in SoftPos.eu, especially considering that it supported the company's new product launch: Worldline Tap on Mobile. With the help of the Android application, all retailers can take payments from customers using a smartphone, tablet, or enterprise device with just one simple tap.
In a similar manner, PhonePe recently bought ZestMoney to have immediate access to a ready-made consumer credit base. Additionally, it strengthens PhonePe's financing strategy – a market that its rival Paytm has already successfully mastered.
The agreement between JP Morgan and Viva Wallet was another comparable deal. The bank purchased 48.5% of the startup for more than USD 800 million. The financial institution now has access to an omnichannel solution that offers seamless, conversion-boosting, and secure ways to process transactions both in the physical and digital worlds, streamlining business operations and improving the customer experience.
Fintechs will seek a quick departure due to the macroeconomic climate (higher interest rates, more cautious VC activity, generalised slowdown in GDP, or full-blown recession). By contrast to the more common options during the past few years, which were raising money to drive growth or a public exit, that will lead to companies being more inclined to merge with, or be purchased by, larger peers.
According to a poll conducted by Financial Brand of financial institutions, the top three strategic priorities for respondents were expanding data and analytics capabilities, lowering operating expenses, and improving the digital experience for consumers. Fintechs can offer incredibly viable answers to all of these problems because they are full of great technical talent and lean operations.
According to the same Financial Brand report, an increasing number of traditional financial services companies have experimented with fintech collaborations. Regulatory compliance and procurement are expected to be speed-blocking issues and they may affect businesses across all industries. However, the groundwork has been laid for future cooperation and an increase in M&A during the coming year is still predictable.
About Claudia Pincovski
Claudia is a senior content editor at The Paypers working on the Banking & Fintech team at The Paypers. Holding a bachelor’s degree in Journalism, she is very passionate about exploring the latest news on financial inclusion, financial literacy, digital banking, and Open Finance. Claudia is a diligent researcher, a meticulous editor, and an active advocate for diversity and inclusion.
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