Morgan Stanley CEO predicts Fintech “Washout” that will lead to more M&A

• Morgan Stanley CEO James Gorman predicted a “washout” for fintech firms in an earnings call.
• The way to get hold of the decline in value is consolidation, he said.
• The $1.4 trillion bank is no stranger to acquiring fintechs to bolster its technical prowess.

The market is volatile, but Morgan Stanley CEO James Gorman sees it as a return to normalcy.

“We’ve seen some of the more ridiculous things that have been in the market in the last year. Companies trading at 50 times revenue, what’s happened to Bitcoin trading at $60,000, and what’s happened to GameStop and other companies, Gorman said in its third-quarter results on Oct. 14. “This kind of aberration-type trade has been washed out, and that’s okay. We’re back to basics.”

This “washout” has not left fintech unscathed, Gorman said.

The numbers tell the same story. Valuations for publicly traded fintech firms fell 70-80% from their peaks from October 2021 to May 2022, according to a report from Andreessen Horowitz.

Gorman joked that these fintechs previously traded at multiples that Morgan Stanley “could only dream of here in our modest little house,” referring to the $1.4 trillion bank. But the days of fintech trading at 25x turnover are over and the way forward for the fintech industry is consolidation, Gorman said.

“A lot of these businesses are scale-driven businesses,” he said. “You have huge technology requirements to support cyber security and stop client fraud and data control and management and so on. So consolidation is the key word.”

Gorman predicted that prices will stabilize around the end of 2023 and that sellers currently in the market are there out of necessity.

Consolidation in the fintech space is nothing new for Morgan Stanley, he added.

“We’ve moved aggressively to be at the forefront of that,” he said.

Morgan Stanley has made high-profile fintech acquisitions with its $13 billion purchase of self-managed brokerage platform E*Trade and a $900 million deal for Solium, an employee stock option management and cap spreadsheet software firm.

The M&A momentum is unlikely to pick up until the founders come to terms with lower valuations

The bank was not the only one to participate in the action. Fintech deals reached breakneck speed in 2021, with 906 global fintech M&A exits and investors pumping $132 billion globally into fintechs for the entire year, according to CB Insights.

But the gravy train came to an abrupt halt as market volatility and a looming recession overshadowed the market. Fintech momentum in 2022 is falling fast – globally, fintech funding and M&A exits were down roughly 30% from the first to the second quarter of this year, having already fallen off 2021 levels, according to CB Insights.

However, fintech entrepreneurs have been reluctant to face their new reality, according to a number of VCs. VCs, armed with capital ready to be deployed, take their time and conduct due diligence. They do not plan to budge on the 2022 discounts on fintechs and have urged founders to come to the table with realistic expectations.

When asked about advising clients on deals later in the call, Gorman acknowledged that some founders are in denial about the decline in value.

“I think CEOs of established or on the way to established companies are becoming very realistic and they want to move forward with the business,” he said. “I think the ones that are still struggling are private companies that were valued at — let’s just say — sporty levels, and they’re finding that they’re just not getting paid the same, and that’s hard to accept as an entrepreneur. That’s their baby. , and they’ll think that’s what it was at the top, and maybe it was overrated at the top.”