Over the past couple of years, the fintech sector has experienced tremendous M&A activity, in particular within the payments industry. Last year, for instance, the sector witnessed three mega-mergers between US payments services companies. As a result of these deals, US payments companies are now significantly larger and more profitable than their European counterparts.
More generally, 2019 was a record year in terms M&A activity for the whole fintech sector, not just the payments industry, and another bumper year for overall investment in fintech. Global M&A deal value rose from USD 91 billion in 2018 to a record high of USD 97.3 billion in 2019, despite a sharp drop in the number of deals agreed, from 622 to 426, according to audit tax and advisory services company, KPMG.1
After a promising start of 2020, the market rout caused by the rapid spread of the Covid-19 pandemic and the drastic lockdown measures taken across the world to curb contagion slowed fintech M&A activity considerably in March. Yet despite uncertainty raised by the pandemic on economic activity, the structural catalysts of deal-making, such as the need for many fintech firms to increase scale and add new capabilities to their businesses, for example, remain in place.
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Consolidation needed in European payments
Also, Europe could well host the next wave of M&A activity among payments companies, as the Payments Service Directive 2 (PSD2), which came into effect last year, opens up local domestic markets for intra-European consolidation. This should entail cross-border deals with the likely participation of banks that often are the owners of the payments businesses involved.
M&A is also very likely to resume in other more specific areas of fintech, such as peer-to-peer lending and cybersecurity. Meanwhile, Chinese tech players, such as Ant Financial or Alibaba, are increasingly looking to expand overseas through takeovers, joint ventures and partnerships, as local regulations make development from scratch in countries such as India, Indonesia and Vietnam very difficult.
As restrictions on economic activity to fight the Covid-19 pandemic are gradually lifted around the world, a key question is whether the recent deal spree will restart right away, or if more time is needed to restore confidence. Generally lower valuations mean that many fintech firms now represent very attractive targets. However, potential sellers, in particular venture capital firms, may be inclined to wait.
Patrick Lemmens
Portfolio Manager
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Generally lower valuations mean that many fintech firms now represent very attractive targets.
Pandemic-related restrictions may slow deal talks
Domestic and international travel restrictions, as well as the measures taken by many companies to enable employees to work from home in response to the Covid-19 pandemic could, of course, make future deals more difficult to initiate in the short term and slow down the closing of planned takeovers. Yet more innovative ways of getting things done - including in the context of M&A deals - could surprise investors as time progresses.
We therefore remain relatively optimistic, in particular regarding transactions implying large, cash-rich companies spending a few billion US dollars to add new capabilities to their portfolios. For larger deals implying swaps of battered stocks, better visibility regarding the financial and economic recovery might be warranted.
While potential M&A activity is not the primary focus of the Robeco FinTech and New World Financials strategies, financially and strategically sensible transactions are always a welcome development. The two investment strategies focus on companies with sound fundamentals and attractive growth prospects and are exposed to M&A both from an acquired and an acquirer perspective.
Footnote
1 “Pulse of Fintech H2’2019”, KPMG.
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