When Payments M&A Is Backed By Valuation, Not Strategy
FX & Float: Operator Note
Recent activity in payments M&A has gone up sharply. We saw Global Payments acquire Worldpay for $24.25 billion. Nuvei announced its deal to acquire Payoneer for $2.75 billion. This was right after a 6% cut in workforce, and as stated by its management, before the share price started reflecting the operational progress made. The biggest announcement was Stripe and Advent International coming together to bid $53 billion for PayPal. PayPal’s lowest value this year was $36 billion, a mere 10% of its peak valuation in 2021.
Not surprisingly, every deal announcement characterises the deal as strategic. Something that will add scale or distribution, enhance stablecoin infrastructure, or strengthen licensing footprint. While these are partially true, the larger reason is much simpler. Current valuations make these companies look cheap, and buyers with capital are coming in. Fintech M&A multiples were 7.7x revenue in 2021 and now stand at just 4.4x. Strategy is definitely part of the story, but the more compelling reason why these deals are happening now is their valuation.
This is not new. This has happened whenever quality companies have become available at a discount. What happens with this is that buyers underestimate the cost of integrating the company they are buying.
Bank of America bought Countrywide in 2008 for $4 billion. This was a steep discount compared to Countrywide’s valuation a couple of years back. BofA wanted to get scale, distribution and a mortgage servicing platform, which would otherwise have taken years to build. But together with these assets, BofA also inherited the legal exposure of Countrywide’s underwriting practices. Over the next decade, BofA paid more than $40 billion in settlements, litigation and other losses. A big part of this was the price BofA paid to absorb a business that, by design, was not fit to run inside BofA.
Buying the company is the first step. Integrating it to realise the full value is the main step. This is usually a multi-year and multi-department project. And in payments, it is much harder than any other industry.
Payments acquisition is complex because it means merging two different compliance stacks built on different vendors and calibrated to different risk appetites. It also means reconciling between two networks of banking relationships which are influenced by a gamut of regulations. It also means combining licensing footprints across multiple jurisdictions, identifying synergies and redundancies in each jurisdiction, and finally merging the two product architectures that may not be compatible in their build while continuing to serve customer transactions.
The full integration usually takes two to three years. However, most models used to calculate the acquisition price bake in a much smaller timeframe. The more the gap between the modelled timeline and the actual time taken, the more value is lost from the deal. This manifests in duplicated teams that cannot be merged, engineering effort spent merging the two platforms instead of building new products, or losing customers whose experience gets worse during the transition phase.
A discount in the valuation of a company could also be hiding something; usually, when a company is available at a fraction of its former valuation, it happens for some reason. This could be weakening unit economics, high churn in the customer base, a lingering compliance debt, or a product that is no longer competitive. While the acquirer prices the deal on a revenue multiple and assumes the other issues are easy to fix, these fixes almost always take longer and cost more than planned.
This is not a case against acquisition or consolidation. Many of the deals work well, especially where the acquiring company is honest about why the target is cheap and realistic about the integration effort and costs. This is more true in the current scenario: the deals most likely to succeed and increase in value will be the ones not with the best strategic narrative, but the ones rooted in a realistic understanding of the target’s valuation and integration effort.
A discount is not a bargain until you know what is leading to the discount. This is especially true for payments M&A.