Merger and acquisition activity in the first half of the year plummeted, according to two firms tracking such transactions, but a flurry of recent deals suggests M&A activity may spool up in the second half of the year.
Payments consulting firm The Strawhecker Group counted 34 payments M&A deals globally in the first half of the year, according to TSG Project Manager Zach Spellman. That’s down 50% over the same period last year, which racked up 67 deals, according to data shared with Payments Dive.
Based on the 10 deals that disclosed transaction value, the transactions sum for the first half of the year was approximately $3.1 billion, Spellman said. That’s compared to $11.3 billion for the same time period last year, when 16 disclosed transaction value.
Figures from research firm Dealogic also reveal a drop in M&A activity. Dealogic recorded 39 U.S. payments deals in the first half of the year, a 40% decrease compared to the same time last year, when 65 deals were tallied, according to data shared with Payments Dive.
Notably, however, Dealogic’s dollar tally for U.S. payments deals in the first half of this year was higher than for the period last year: that firm logged $8.7 billion for the first six months this year, compared to $3.9 billion last year. Both firms track transactions where a payments company was the acquiring or the acquired company.
Acquisition activity for the year kicked off with Canadian fintech Nuvei’s $1.3 billion purchase of the Atlanta payments company Paya. Also earlier this year, card network American Express said it was buying business-to-business automation company Nipendo; card network Mastercard bought cloud-based cybersecurity firm Baffin Bay Networks; and card issuing fintech Marqeta acquired Power Finance for $275 million.
After the Silicon Valley Bank collapse slowed venture capital funding and M&A activity in March and April, it now feels as if the industry is moving on from that, said Jordan McKee, a principal research analyst with 451 Research, part of S&P Global Market Intelligence.
In late June, card network giant Visa said it was acquiring Brazilian startup Pismo for $1 billion. And since the first half ended, private equity firm GTCR announced its intention to purchase a 55% stake in Fidelity National Information Services’ Worldpay unit for $11.7 billion and merchant acquirer Merchant Lynx Services said it would buy payment acceptance provider National Credit Card Processing Group.
“The general theme that we’ve seen for the past few quarters is smaller, tuck-in deals,” McKee said. He pointed to FIS’ purchase of fintech Bond last month, likening that to a distressed asset sale and calling it an example of a company “at the point of either shutting down or getting a soft landing” within a larger company’s portfolio, he said.
Factors stifling deal activity
Acquisition activity was expected to ramp up this year after company valuations declined amid a more uncertain economic environment in which venture capital has become less plentiful. But a number of factors have suppressed deal activity, said Sam Wares, director of client success at TSG.
Buyers are doing more due diligence than they were during the COVID-19 pandemic, and as company profitability has become more important than growth, acquirers are “looking at companies completely differently,” Wares said.
On the seller side, many are holding on to a valuation they received a year or two ago during a vastly different climate. “Negotiations between buyers and sellers are definitely longer than they have been previously,” Wares said.
Changes to deal terms has also put a damper on activity, he said. Large, lump-sum payouts at close have become less common, and buyers are requiring longer-tail proof for what they bought, Wares said. The latter is “not as attractive to sellers, so if a seller feels like they can wait, they’re going to wait,” he said.
Valuations may not go back to where they were, but if interest rates fall and the cost of capital drops, there may be more cash deals, he explained. Sellers would welcome a shift to cash offers, he said.
In the push and pull between buyers and sellers, “the desire is stronger on the side of the buyers at the moment,” Wares said.
At the beginning of the year, Autonomous Research analysts named “small-cap software providers,” including fintech nCino, international payments enabler Flywire, restaurant payments company Toast and point-of-sale software provider Lightspeed Commerce as possible acquisition targets.
All of those publicly-traded payments players are still potential candidates for acquisitions, “especially given some of the more recent PE interest in the Worldpay asset,” said Autonomous Research Analyst Ken Suchoski in a July 17 email. “Shift4 and Bill are other names that are floated as acquisitions as well.” Buyers could be incumbent payment companies or private equity firms, Suchoski said.
Spokespeople for all of those companies didn’t respond to requests for comment.
The investment firm William Blair also named potential smaller or mid-cap payments targets earlier this year. They included cross-border payments business Euronet, virtual card company Marqeta, payments services provider Payoneer, cross-border firm Remitly, payment acceptance provider Repay and fraud software company Riskified.
In a follow-up interview this month, William Blair Analyst Robert Napoli declined to comment on those companies, but said there’s plenty of potential acquirers and targets. As the gap between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept narrows, “you’re going to see a lot more M&A,” Napoli said.
McKee expects to see more tuck-in deals similar to FIS’s acquisition of Bond, especially in the fourth quarter, if startups are unable to secure the venture capital needed to stay afloat. In particular, banking-as-a-service and embedded finance startups may be vulnerable, given there are too many vendors and not enough business opportunity, he said. There could be “a thinning of the herd” in those areas, McKee said.
McKee wouldn’t be surprised to see the card networks pursue more acquisitions to expand in the real-time payments or healthcare verticals. He also expects large payment processors may continue to evaluate their portfolios and sell business units as they’ve done over the past year to “lighten up a little bit,” he said.
When it comes to M&A activity, Wares doesn’t expect the second half of the year to be much more active than the first. He declined to comment on potential acquirers or targets.
Buyers who Wares works with have “really specific” acquisition interests, Wares said. “Their requests being as narrow as they are, it's hard to find targets that meet their needs. So they’re willing to wait.”