Morgan Stanley’s big play for little investors

by Scott Denne

Fintech deals keep coming as Morgan Stanley shells out $13bn of its stock for online financial broker E*TRADE. As we’ve previously noted, payments and financial services firms accounted for an outsized share of this year’s and last year’s deal activity as they look to acquisitions to align with changes to the tech landscape.

Morgan Stanley’s move isn’t driven so much by E*TRADE’s technology as much as it’s driven by access to the target’s retail clients. Over the past five years, Morgan Stanley has transformed its business through a focus on wealth management, particularly at the high end of that market. That business today accounts for just over half of its pretax profit, up from one-quarter five years ago. The E*TRADE buy extends that business into smaller retail investors – the seller manages an average of $70,000 per client, less than one-tenth of Morgan Stanley’s average client.

E*TRADE isn’t exactly a tech vendor, but it wouldn’t be able to service so many small clients without its online interface. And that’s illustrative of many of the recent fintech deals we’re seeing – it’s not that financial services providers are buying tech so much as they’re buying into markets that are opened by tech. While online brokerages, which have been around since the dot-com days, aren’t new, the growth of the category and the entry of startups have driven competition to new heights, causing most players to drop their fees and find buyers.

Banks aren’t the only companies in financial services printing major acquisitions to move into tech-enabled markets. For example, Visa, in its largest-ever tech deal, paid $5.3bn last month for Plaid, a maker of payment-processing APIs for software developers as more payments happen via e-commerce sites, mobile apps and other software interfaces. We’re likely to continue to see transactions along a similar vein as financial services firms broadly expect technology to impact their market. According to 451 Researchs Voice of the Enterprise: Digital Pulse, Budgets & Outlook, one of every three employees of finance companies expect digital technologies to significantly disrupt their business model in the next three years, compared with just one in four across all industries.

Figure 1: Level of digital disruption expected in next three years

Source: 451 Research’s Voice of the Enterprise: Digital Pulse, Budgets & Outlook 2018

Payments keep printing

by Scott Denne, Jordan McKee

Businesses are rethinking the role of payments in their growth strategies, a shift that’s pushing payment providers to print larger deals to meet their customers’ changing requirements. As we recently noted, 2019 saw a surge of big-ticket payment transactions that propped up the deal value total in last year’s tech M&A market. That trend hasn’t slowed this year, as the space has already witnessed two $5bn-plus acquisitions in the past month.

In mid-January, Visa printed its largest-ever tech transaction with the $5.3bn purchase of Plaid, a supplier of payment APIs that should enable Visa to move beyond credit card processing. At the start of February, Worldline reached for Ingenico to add a range of new payment services, leveraging the target’s roots as a point-of-sale (POS) vendor. In addition to being Worldline’s largest deal, it valued the Ingenico at 2.9x trailing revenue, nearly double the 1.6x median for POS providers over the past four years, according to 451 Researchs M&A KnowledgeBase.

Aside from topping the previous high-water marks of their respective acquirers, those transactions (and many of the previous ones in the space) have a shared rationale: Both were done to expand the buyers’ offerings across multiple payment channels, something that has become imperative as payments move beyond the finance and treasury departments. As we noted in 451 Researchs 2020 Trends in Customer Experience & Commerce, several notable companies have made such a change., for instance, moved its payments team within its product group, while Spotify placed its payments unit within its growth-focused business division.

Meanwhile, 77% of businesses say the payments segment has become a highly strategic area. While this change is likely to spur further consolidation, it could also push payment vendors toward acquisitions in related areas such as customer loyalty, customer data management and content management.

Figure 1: Payments M&A

Source: 451 Research’s M&A KnowledgeBase. Includes estimated and disclosed deal values.

Financial firms clear a path for emerging tech

by Michael Hill

As they look toward IT to solve business problems, financial firms and the software developers that cater to them are expanding their acquisitions of emerging technology companies. While overall fintech deal volume subsided slightly in 2018, the number of blockchain and machine learning transactions by those buyers rose sharply.

According to 451 Research’s M&A KnowledgeBase, the number of fintech blockchain deals increased sixfold in 2018, to 19 transactions. Those same acquirers also expanded their appetite for machine learning, printing eight purchases of machine learning targets, from just three a year earlier. The high multiples – including two deals that went north of 20x trailing revenue – and volume of tuck-ins and ‘acq-hires’ attest to the early stage of those technologies. Still, the rationale behind such transactions shows that these technologies, at least in financial services, are entering the mainstream.

Take Ernst & Young, which in July purchased the assets of cryptocurrency accounting software developer Elevated Consciousness. That deal suggests that at least one of the big four accounting firms views cryptocurrencies as an asset class that’s viable enough that it needs to help its clients assess the risk and tax implications of such investments. Elsewhere, TD Bank’s January reach for predictive analytics specialist Layer 6 was driven by its recognition of machine learning’s potential to improve customer experience.

As our surveys demonstrate, financial services rely on IT to meet business goals more so than other industries. In 451 Research’s recent Voice of the Enterprise: Digital Pulse, 56% of financial services executives have business-focused IT goals, compared with 48% for the entire study, while blockchain and machine learning were among the top four technologies anticipated to have the most transformational impact on business operations by 2020.


Capital One builds up its M&A credit

by Scott Denne

Anticipating a digital disruption in finance, Capital One has printed its third tech acquisition of the year with the purchase of Wikibuy, a comparison shopping site. Today’s deal sets a new high-water mark for tech M&A for the consumer credit firm and comes as other banking and insurance companies look to add technology assets in anticipation of changes to the banking and insurance industries.

Capital One opened the year with the pickup of Notch, a machine learning consultancy. In the spring, it reached for Confyrm, an antifraud specialist. Prior to today’s transaction, Capital One had never bought more than two tech vendors in a single year and had only hit that mark twice, according to 451 Research’s M&A KnowledgeBase.

While those earlier deals address the operational side of disruption by adding to Capital One’s arsenal of risk management and credit-scoring tools, today’s move expands its footprint with consumers. Wikibuy provides a price-comparison website, along with services that offer consumers price updates on certain products. The transaction could help Capital One start to play a role, beyond payments, in its customers’ financial lives.

Taken together, these deals follow three or four years of public prognostications by Capital One’s management of a coming digital disruption in banking. Now the company appears to be turning toward tech consolidation to prepare for it. In that respect, it’s not unique among its peers. Allstate, for example, inked its second-ever tech acquisition with the purchase of credit-monitoring service InfoArmor in August. Three months earlier, Principal Financial Group made its first tech deal by acquiring RobustWealth, a maker of customer engagement software for financial advisers.

According to our surveys, the notion of a coming disruption to financial industries is widely anticipated. In 451 Research’s Voice of the Enterprise: Digital Pulse survey, 62% of respondents in finance anticipated a highly disruptive impact on their industry over the next five years – only media and telecom scored at or above that level.

IHS makes its mark on financial sector with $5.9bn Markit buy

Contact: Mark Fontecchio

IHS pays $5.9bn for Markit Group, the biggest deal in online financial information and analysis, according to 451 Research’s M&A KnowledgeBase. The acquisition increases IHS’s headcount and revenue by about 50%, giving it strong entry into online reference and analysis data in the financial sector to complement its similar offerings in the energy and automotive verticals. While the two vendors perform similar functions, their customer bases don’t overlap much, with IHS’s clients including most of the top oil and automotive companies and Markit selling to banks, hedge funds and other financial institutions.

IHS and Markit will merge to form a new entity called IHS Markit, of which IHS shareholders will own 57%. The transaction values Markit at 5.9x trailing revenue, a few ticks higher than the 5.5x multiple that Intercontinental Exchange paid for Interactive Data Corp (IDC) in a similar deal last October. IDC’s revenue had a 3.8% CAGR over the previous five years, compared with Markit’s roughly 10% CAGR over the previous four years. That said, Markit’s 4.5% revenue increase to $1.1bn last year was considerably slower than previous rates in the 10-12% range.

The move marks the third $5bn+ transaction in financial technology in the past year, and highlights fintech M&A as one of the few bright spots this quarter. While overall deal value is down about 30% to $62bn thus far in 2016, the Markit sale has lifted fintech M&A up 79% to $7.4bn. The transaction is expected to close in the second half of this year. M. Klein and Company, Goldman Sachs and Bank of America Merrill Lynch advised IHS, while J.P. Morgan Securities banked Markit.

SS&C pays a premium for Advent

Contact: Scott Denne

SS&C Technologies scoops up Advent Software in one of the highest multiples we’ve seen among software vendors serving the investment and finance community. At $2.5bn, SS&C values the target at 6.8x trailing revenue.

The valuation is predicated on cross-selling Advent’s portfolio management software and services alongside SS&C’s broader offering of fund administration and related software, then using the accelerated revenue to pay down the combined company’s new debt. SS&C is funding the deal with $3bn in new debt and refinancing. Few businesses switch out their portfolio management systems and given that those products generate about 70% of Advent’s revenue, cross-selling could be a tricky proposition.

The combined company, however, will be well-positioned to win sales among new firms and new lines of business at existing ones. For example, SS&C has a hedge fund administration business (one it obtained in 2012 with the $895m purchase of GlobeOp) and Advent also has portfolio management for that same audience. As stock markets rise, so too will new hedge funds.

While the transaction is the highest multiple in this sector in nearly a decade, according to The 451 M&A KnowledgeBase, it’s not without precedent. Carlyle Group paid 8.2x TTM revenue when it took SS&C private in 2005 for $982m. And SS&C itself is trading today at 6.8x, benefiting from a 10% bump in its share price on news of the deal.

Following the close, SS&C will have a 5.3x debt-to-EBITDA ratio. The acquirer has leveraged up before to get a transaction done. Following its own take-private, it was at 6.8x and after its pickups of GlobeOp and Thomson Reuters’ PORTIA business in 2012 it was up to 4.2x, which today stands at 1.4x. Judging by the increase in share prices, Wall Street is confident it can de-lever again.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

eBay adds Braintree to payments brain trust

Contact: Scott Denne

eBay’s PayPal subsidiary is paying $800m for payments software provider Braintree Payment Solutions to advance its position in serving software and e-commerce businesses. Through organic growth, Braintree became the payments technology provider of choice for many high-growth e-commerce startups. Cementing its position was an inorganic move meant to help its customers tackle the growing adoption of mobile payments.

Braintree was specifically chosen to bring more software vendors, especially mobile software firms, to eBay’s PayPal business. Braintree specializes in providing payment processing for the newest generation of consumer Internet and SaaS companies. As those companies – such as Airbnb, LivingSocial, Uber and – have grown, Braintree has grown with them. And as those companies became more mobile-focused, so too did Braintree, by acquiring mobile-wallet provider Venmo for a reported $26m last year.

Just as it has in its last two major payments purchases – the $240m reach for Zong in 2011 and the $820m pickup of Bill Me Later in 2008 – eBay is paying a mindful price for Braintree. While Braintree’s revenue isn’t disclosed, the company is still small – it processes less than one-tenth of PayPal’s total. Braintree’s platform processed $4bn in payments in 2011, netting the vendor $10m in revenue. Now, it’s on pace to process $12bn in annual payments. Keeping the ratio constant would likely put its revenue in the $30-40m range. If our rough math is correct, the deal would value Braintree at a whopping 20x sales.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

In ICE-NYSE deal, a shark swallows a whale

by Brenon Daly

For all of the talk about the disruptive forces that have reshaped the tech landscape through M&A, the changes – at least at the high end of the market – have been largely incremental. Just take a look at deal flow so far this year. We’ve seen a bit of big-ticket telco consolidation as well as a pair of multibillion-dollar take-privates, the largest of which would see the current CEO play a leading role in not only the transaction itself but also the operation of the company after the close. It’s hardly dramatic stuff.

Certainly, we would argue that not one of those deals comes anywhere close to the upheaval embodied by the IntercontinentalExchange’s (ICE) planned acquisition of NYSE Euronext. The deal, which was backed by NYSE shareholders today, may well be the ultimate example of a startup gobbling up an established vendor.

For starters, the roles in the transaction are flipped from what we would expect in a typical tech deal. (Indeed, the NYSE has been a busy buyer in recent years, expanding into electronic trading platforms and consolidating old-line exchanges both in the US and abroad via M&A.) Consider the fact that ICE is barely more than a decade old while the fabled NYSE traces its roots back to 1792. And while ICE is the buyer, it is less than half the size of the NYSE, or the ‘Big Board’ as it is known on Wall Street.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

IntraLinks finally gets to use its deal room

Contact: Brenon Daly

Although IntraLinks is well-known for its ‘virtual deal rooms,’ the company itself hasn’t spent much time in them. That changed on Thursday. After being out of the market for more than a decade, IntraLinks announced a double-barreled deal, picking up two online deal-sourcing platforms, MergerID and PE-Nexus. (And yes, the company did use its own deal room to run the process.)

The addition of the two sourcing platforms makes sense as a way to increase the number of transactions that get executed in IntraLinks’ core deal room. In fact, the company had added sourcing and networking features around the end of 2011, but had only attracted a few hundred users. MergerID and PE-Nexus dramatically increase the number of potential participants, with the two firms having attracted, collectively, some 5,000 firms representing about 7,200 total users.

Further, the two platforms serve very different markets. MergerID – divested by the FT Group’s Mergermarket division – focuses on midmarket deals, primarily in Europe and Asia. Meanwhile, PE-Nexus (as its name implies) largely targets US private equity shops from its Florida headquarters. IntraLinks has indicated that it will pick up 11 employees from the two firms, and we understand that very little revenue will be added from the two subscription-based services.

More broadly, IntraLinks’ move fits with the strategy and recent performance of its business. The M&A unit, which represented 42% of total revenue in 2012, was the only one of the company’s three divisions to post growth last year. The 9% increase in its M&A-related revenue in 2012 helped bump up the overall top line at IntraLinks during what was – by design – a year of stabilization and investment.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Fiserv acquires Open Solutions and its debt

Contact: Ben Kolada, Tejas Venkatesh

Fiserv has acquired fellow financial software company Open Solutions, adding new clients and bolstering its offerings for credit unions and banks. Fiserv is buying Open Solutions from Carlyle Group and Providence Equity Partners, paying $55m for the target’s equity and assuming $960m in debt. While Open Solutions’ enterprise value (EV) this time around is about 20% less than its price in its 2006 take-private, its equity value is a much smaller fraction of the previous transaction.

In the time since Carlyle Group and Providence Equity took Open Solutions private to Monday’s sale to Fiserv, the company’s debt has ballooned. Open Solutions had roughly $448m in net debt when it announced that it was being taken private. That amounted to about one-third (36%) of its total EV. The company’s debt has nearly doubled in the past six years and now accounts for nearly all (95%) of its EV.

Although Open Solutions’ debt does appear troubling, Fiserv is recognizing some financial benefits from the acquisition. Open Solutions has had a history of losses, which means that tax breaks are available to Fiserv. The net present value of those breaks is $165m, which will ultimately reduce the total cost of the acquisition from $1.01bn to $865m.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.