The slashed valuations of some publicly traded financial technology companies will continue to prompt M&A interest from strategic and private equity buyers.
Many fintech companies went public with lofty valuations during the latest 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 Jan. 19, and opportunistic buyers — such as private equity firms — are hoping to take advantage of the depressed values.
"We certainly are continuing to spend time on take-privates, which we hadn't spent time on for a very long period of 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 some more interesting opportunities in the fintech take-private space. We are actively discussing various opportunities."
The market correction developed as public market investors shifted their focus to profitable companies and away from those growing at all costs. Many high-growth but break-even or unprofitable businesses valued off of revenue multiples have faced a material valuation cut, which in some cases could be by nearly half, while the valuations of profitable businesses are less impacted, Rao said in an interview.
In some of the recent large fintech deals, targets accepted valuations far below 2021 trading levels even if they received market premiums when selling. For instance, Vista Equity Partners announced in January its pending $2.6 billion deal for insurance software provider Duck Creek Technologies Inc., a target that agreed to sell at $19 per share. It was lower than Duck Creek's IPO price in 2020 of $27 per share, and in 2021, Duck Creek completed a follow-on offering at $46 per share.
With a similar valuation trend, 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 special purpose acquisition company South Mountain Merger Corp., sold to EQT at $9.50 per share after its stock topped $19 per share in 2021, and the company sold shares at $12.25 per share in a follow-on offering that same year.
"We're going to have to go through a pretty painful flushing-out process because the fintech space was given very low cost of capital, and as much money as they could take, and that phenomenon is turning over hard 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 great products," Price said in an interview.
Of course, many sellers are hesitant about selling at the lower prices, and the overall drop in equity valuations has slowed deal 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
Sellers could be more receptive
With economic uncertainty remaining persistent, targets in recent deals are locking in the market premium offered by the buyer instead of waiting for a rebound of stock prices. This 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 can covet, according to equity analysts.
Analysts pointed to Nuvei Corp.'s Jan. 9 announced deal to acquire Atlanta-based Paya Holdings Inc. as a meaningful reference of the current valuation paradigm in the fintech sector. The transaction has a deal value of $1.31 billion, representing a nearly 16x 2023 consensus EBTIDA multiple before considering synergies, according to Truist Securities analysts. It also suggested a 25% premium to Paya's Jan. 6 closing price, the last trading day prior to the announcement.
The deal's per-share price of $9.75 was below the stock's high point, which was above $14 in late 2020. But Truist Securities analysts deemed it as a bullish valuation in the market condition that could benefit companies in the same ecosystem if they were to consider a sale, including Repay Holdings Corp., Green Dot Corp., Shift4 Payments Inc., Euronet Worldwide Inc. and WEX Inc., according to an equity research note Jan. 9. Other viable targets include Lightspeed Commerce Inc., Affirm Holdings Inc., Marqeta Inc. and Flywire Corp., they wrote. Paya's higher valuation was in part built on higher profitability, they noted.
William Blair analysts also anticipate more M&A activity to follow, especially for some smaller or midcap names, such as Payoneer Global Inc., Euronet, Remitly Global Inc., Repay, Riskified Ltd. and Marqeta, according to a Jan. 9 equity research note.
Repay and i3 Verticals Inc., another peer integrated payments company, each caught a bid in the public market before market open Jan. 9, after Nuvei announced the same day the intention to acquire 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 take place. Our feeling is, we may see more of that going into 2023 as valuations have come down quite a bit in the public market," Robert Ruark, a principal of financial services strategy and fintech leader at KPMG, said in an interview.
Macro factors stabilizing
Greater market stability in 2023 would also help get deals over the finish line.
Changing economics created some of the biggest obstacles for deal closures in 2022. The Federal Reserve's aggressive rate hikes have rapidly increased the cost of financing, and the drastic valuation downtrend also made it difficult for buyers to justify the prices in agreed-upon deals while they waited for the results of prolonged regulatory reviews, Ruark noted.
Two of the deals previously on the list of the largest deals since 2021 were terminated due to such factors as regulatory scrutiny or an alteration of the parties' strategies. In September 2022, UBS Group AG and robo-advisor Wealthfront Corp. terminated their deal agreement, reportedly due to pushback from shareholders and regulators. In November 2022, State Street Corp. and Brown Brothers Harriman & Co. ended the agreement for State Street to acquire 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 the current market conditions could lead to a very attractive time period to make investments, Rao said.
"We are optimistic that sellers are readjusting 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 appropriately modeled, including modeling in a recession, we want to be aggressive in deploying capital."
