Fintech M&A Deal Tracker: Buyers looking to acquire public targets on the cheap

The slashed valuations of some publicly traded fintech companies will continue to spark M&A interest from strategic and private equity buyers.

Many fintech companies went public at high valuations during the last peak around 2021, only to see their share prices plummet in 2022. The one-year total return of the S&P Kensho Future Payments Index was negative 19.09% as of January 19, and opportunistic buyers – like private equity firms – hoping to take advantage of the depressed values.

“We certainly continue to spend time on take-privates, which we hadn’t spent time on in a very long time, just given the valuations,” said Ganesh Rao, managing director and head of financial technology and services at private equity firm Thomas H. Lee Partners . “But now there are several interesting opportunities in the fintech take-private area. We are actively discussing various opportunities.”

The market correction developed as public market investors shifted their focus to profitable companies and away from those that grow at all costs. Many high-growth but break-even or unprofitable companies valued at multiples of earnings have faced a significant cut in value, which in some cases can be by almost half, while the valuation of profitable businesses is less affected, Rao said in an interview.

In some of the recent major fintech deals, targets accepted valuations well below 2021 trading levels, even though they received market premiums on sales. For example, Vista Equity Partners in January announced its pending $2.6 billion deal for insurance software provider Duck Creek Technologies Inc., a target that agreed to sell at $19 a share. That was lower than Duck Creek’s 2020 IPO price of $27 per share, and in 2021 Duck Creek completed a follow-on offering at $46 per share.

At a similar valuation, BTRS Holdings Inc., a payment technology company doing business as Billtrust, was acquired by EQT Partners Inc. in December 2022 for $1.7 billion. Billtrust, which went public in 2021 via a merger with specialty acquisition firm South Mountain Merger Corp., sold to EQT at $9.50 per share after the stock topped $19 per share in 2021, and the company sold shares at $12.25 per share in a follow-up offering that same year.

“We have to go through a pretty painful washout process because the fintech space was given very low capital costs, and as much money as they could take, and that phenomenon is turning 180 degrees,” said Jonathan Price, executive vice president at banking software provider Q2 Holdings who oversees corporate development .

“What this will force is good companies to become more efficient and manage their burn rates and build good products,” Price said in an interview.

Of course, many sellers are hesitant to sell at the lower prices, and the general fall in stock valuations has slowed down trading activity across sectors. The pace of fintech M&A slowed in 2022 with 371 announced acquisitions involving a fintech buyer or seller, down from 512 in 2021, according to data compiled by S&P Global Market Intelligence.

Sellers could be more receptive

With continued economic uncertainty, targets in recent deals are locking in the market premium offered by the buyer rather than waiting for a rebound in share prices. That sentiment among sellers has the potential to pick up in 2023, and there is no shortage of smaller publicly traded fintech companies — particularly in the payments sector — that private equity firms or larger corporate players could covet, according to equity analysts.

Analysts pointed to Nuvei Corp 9 January announced agreement to acquire Atlanta-based Paya Holdings Inc. as a meaningful reference to the current valuation paradigm in the fintech sector. The transaction has an agreement value of $1.31 billion, representing a nearly 16x 2023 consensus EBTIDA multiple before synergies are considered, according to Truist Securities analysts. It also suggested a 25% premium to Paya’s closing price on January 6, the last trading day before the announcement.

The deal’s price per share of $9.75 was below the stock’s high of over $14 in late 2020. But Truist Securities analysts considered it a bullish valuation in the market state that could benefit companies in the same ecosystem if they were to consider it . a sale, including Repay Holdings Corp., Green Dot Corp., Shift4 Payments Inc., Euronet Worldwide Inc. and WEX Inc., according to a Jan. 9 stock research note. Other viable targets include Lightspeed Commerce Inc., Affirm Holdings Inc. ., Marqeta Inc. and Flywire Corp., they wrote. Paya’s higher valuation was partly built on higher profitability, they noted.

William Blair analysts also expect more M&A activity to follow, particularly for some smaller or mid-sized names, such as Payoneer Global Inc., Euronet, Remitly Global Inc., Repay, Riskified Ltd. and Marqeta, according to a January 9 stock research note.

Repay and i3 Verticals Inc., another peer-to-peer integrated payments company, both captured a bid in the public market before the market opened on Jan. 9, after Nuvei announced the same day its intention to buy Paya, BTIG analysts noted. Both Repay and i3 Verticals represent attractive acquisition targets, they wrote.

“We’ve seen a number of public-to-private deals taking place. Our sense is that we could see more of this going into 2023 as valuations have come down quite a bit in the public market,” Robert Ruark, a principal at Financial Strategy and fintech leader at KPMG, said in an interview.

Macro factors stabilize

Greater market stability in 2023 will also help to get agreements over the finish line.

Changing economics created some of the biggest hurdles to closing deals in 2022. The Federal Reserve’s aggressive interest rate hikes have rapidly increased funding costs, and the drastic decline in values ​​also made it difficult for buyers to justify prices in negotiated deals while they awaited the results of lengthy regulatory reviews , Ruark noted.

Two of the deals previously on the list of the biggest deals since 2021 were closed due to factors such as regulatory scrutiny or changes in the parties’ strategies. In September 2022, UBS Group AG and robo-advisor Wealthfront Corp. up its deal, reportedly due to backlash from shareholders and regulators. In November 2022, State Street Corp. and Brown Brothers Harriman & Co. the deal for State Street to buy Brown Brothers Harriman & Co.’s investor services business, citing regulatory hurdles.

At Thomas H. Lee Partners, the $18 billion private equity firm was very cautious about deploying capital in 2021, in part because of the high valuation in the market, but current market conditions could make for a very attractive time period to make investments, Rao said.

“We are optimistic that sellers will adjust to the new normal and prices that are not at 2021 levels and [are] back to where they’ve been more historically,” Rao said. “So for the right assets that we think we’ve modeled correctly, including modeling in a recession, we want to be aggressive in deploying capital.”