Fintech M&A Deal Tracker: Early signs of a recovery

The slowdown of fintech M&A continued into the first half of 2024, but it may have hit the floor as the Federal Reserve is anticipated to cut interest rates in September, industry experts said.

While several large deals boosted the total deal value in 2024 as of mid-July, the pace of M&A measured by the number of deals in the first and second quarters remained similar to 2023 levels. The largest deals are in the payments segment, with Capital One Financial Corp. proposing to acquire card issuer and payments network Discover Financial Services for $35.34 billion, and an investor group planning to take Canadian payments company Nuvei Corp. private for $5.04 billion. Financial data vendors also attracted strong interest with multibillion-dollar deals.

Dealmakers are still seeing uncertainties for the second half of 2024, as the Federal Reserve is expected to cut interest rates in September. The noise around the presidential election in November also could impact investors' sentiment in the stock market.

"Where clients are not under pressure, we have advised a number of them to kick processes out to 2025 because of some of the uncertainty," said Craig Muir, a partner and the head of software, data and analytics at Solomon Partners.

Waiting would provide sellers with a few more months to focus on driving growth and equity value. "As the gap between seller and buyer expectations continues to narrow, and the market momentum continues to build, we think it will create a conducive backdrop to increased deal activity and more aligned expectations," Muir said in an interview.

Steve Greene, executive vice president at payments company Corpay Inc. who supervises M&A, echoed that deal flow likely will pick back up toward the end of 2024 and into early 2025, when interest rates could be lower.

"By then, companies will have printed their 2024 results and will be looking to price deals off their 2025 budgets," Greene said in emailed responses.

Overall M&A activity has remained sluggish this year, mostly because interest rates continue to be high, Greene noted. The persistently high interest rate has resulted in a lingering disconnection in valuation expectation between most buyers and sellers, he said.

However, Corpay has been an acquisitive buyer after it concluded a strategic review in early 2024. The business payment company is closing a $475 million acquisition of account payable software company Paymerang LLC. It has also signed a definitive agreement to acquire GPS Capital Markets LLC for $725 million, to add cross-border payments and treasury management capabilities.

Steady PE interest

Private equity firms continue to play an important role in using M&A to unlock value for mature, late-stage companies. Of the 136 fintech M&A deals as of July 12, about 29% involved PE buyers.

"These are, in many cases, long-term mature businesses that may have opportunities to grow through additional M&A, and maybe they are not being fully valued in public markets," said Carey Ransom, managing director at BankTech Ventures, a venture capital firm sponsored by community banks.

In the public market, shares of fintech companies have ticked up in 2024 but are still traded lower than 2021 levels across the board. For instance, the S&P Kensho Future Payments Index generated a 13.9% return as of July 29, but the three-year annualized return was -7.5%. It presents opportunities for PE firms to take the companies private and turn around the business, said Wedbush Securities' Moshe Katri.

"For companies that are not really getting any credit from the market despite the fact that they're probably executing, or maybe they're not executing as well — those are opportunities for private equity," Katri said in an interview. Katri switched his role at Wedbush in July to be an M&A adviser from an equity research analyst.

Smaller fintechs hitting runways

Meanwhile, the slowdown in venture capital investments is weighing on smaller, early-stage fintech companies. The challenge to raise capital will likely push some companies to look for a buyer or join forces with a peer.

"We're in a cycle where we will have many companies that are probably good companies, but have been unable to raise the capital that they want to really inflect and continue. So they will be acquired," said David Jegen, a partner at venture capital firm F-Prime Capital with a focus on fintech and enterprise software.

Among venture capital-backed companies, some subsectors have seen a group of high-growth, high-performing companies, and those could be areas ripe for consolidation, Jegen said. An example would be companies in small business banking, where fintech companies offer checking accounts and adjacent software, such as commercial expense management.

"Everybody is converging in some ways to say how do I provide financial services to the mid-market enterprises. So we'll see some acquisitions in that area to round out their portfolios," Jegen said.