While the opportunities in fintech abound, there are obstacles both in the dealmaking process and in the subsequent integration. In this chapter, we explore the issues that dealmakers face from a technology landscape that is ever changing
Acquiring and integrating a fintech business requires an understanding of the target company’s value proposition at a granular level as well as possibly securing regulatory approval for the transaction. Moreover, getting the deal done is only the first step. Acquirers and investors must implement a successful integration plan.
For these reasons, board-level executives can be wary of fintech transactions, says the head of investment at a South African bank. “It can be an uphill task to present the idea of acquiring a fintech business to the board,” the executive warns. “Support is hard-earned and the case for a return on investment has to be strong.”
In practice, the respondents in our survey cite a broad range of challenges. The most common concern for banks and financial institutions (cited by 40%) is that they may not have the technical knowledge to successfully integrate with the business they are acquiring. It is vital that they address this issue before committing to the deal – for example, by building up talent in areas where they are lacking skills and experience. The skillsets available in the target business, including broad integrational expertise as well as specialist technical knowledge, may also be important here.
As for private equity, venture capital and family offices, their most common challenge, cited by more than a third of respondents, is the competition for targets and the scarcity of promising businesses. This was only a concern for 25% of banks and financial institutions – possibly because they have deeper pockets, or because they are targeting fintechs of different scale and size.
One other issue highlighted by all respondents is the potential difficulty of conducting technical due diligence on targets. Resolving this problem will be essential, given that so many fintech transactions are predicated on the desire to acquire or integrate the technology of the target business.
Reed Smith on integration
Acquisition opportunities may be squandered in the absence of a successful integration plan. The most successful acquirers begin their implementation plan well before the deal closes, aligning staff and technology. This is especially important in the acquisition of sophisticated technology in a highly regulated industry.
James Wilkinson, Partner, London
On competition, the battle to partner with the best fintech targets is bound to be a tough one, given the long-term value potential these businesses offer, as well as the ongoing imperative in the financial services sector to embrace digital transformation. However, our research suggests competition is fierce for another reason too: there is a wide range of rivals potentially fighting it out for each target.
More than three-quarters (79%) of banks and other financial institutions regard one another as their biggest source of competition for fintech acquisitions and investments. Significantly, however, these respondents are also likely to expect competition from beyond the financial services sector: almost half (45%) regard the giant technology companies as potential rival bidders.
Private equity, venture capital and family offices are more likely to see their peers as the competition. Here too though, significant numbers are eyeing rivals outside of financial services, with 39% picking out the big technology companies as likely competitors in a transaction.
“Fintech acquisitions are on the agenda of most financial and technology companies this year,” says the managing partner of an Australian venture capital firm. “It is going to be tough to acquire your desired targets given this competition, particularly at a fair valuation.”
Once the competition has been seen off, the hard work of integration and value creation begins. Acquirers need to create a clear plan for technical, financial and operation integration before completion, with the help of third-party advisers if need be.
“All acquisitions carry significant risks and identifying the most critical of those risks can be difficult,” says the director of corporate development at a US financial institution. “You can’t force-fit something but that means you have to take time to let the business settle down – and that can be difficult to manage in a fast-moving market.”
More than two-thirds of financial institutions (70%) worry about their ability to integrate new technologies into their existing mainframe or platform, suggesting that pre-deal work needs to centre on how to marry legacy IT infrastructure with the tools and solutions being acquired.
Similarly, almost half of financial institutions (49%) in this research regard discerning revenue goals and returns on investment as one of their greatest post-merger integration challenges. Again, the key to addressing this issue lies in pre-deal planning. Acquirers and investors need to set clear targets for post-deal performance and build measurement structures that provide visibility and transparency about how those targets are being met.
The final piece of the jigsaw will often be in bringing the new technology or solution to market. This will require investors and acquirers to meet a range of challenges. More than half worry about building customer acceptance for new products and services, while banks and other financial institutions in particular worry about the coherence of the international regulatory frameworks in which they must operate. Private equity, venture capital and family office investors are more likely to worry about domestic regulation, perhaps reflecting the smaller transactions in which they tend to specialise.
Reed Smith on “hit and hope” acquisitions
Not every M&A transaction really succeeds, but the sophisticated acquirers know that, and they look at it differently. They might acquire five technologies knowing full well that one or two of them are going to drop out, but the only way to find out if it works is to own it and kick the tyres as the owner, as opposed to a consumer or customer. As part of the business strategy, if a financial services institution makes one technology acquisition, it has to get it right. If it’s making five, it doesn’t have to get all five right. It’s an expensive test drive.
Herb Kozlov, Partner, New York
Alternatives to M&A
Conventional M&A activity is far from the only way to build fintech exposure. Many in the marketplace are building a range of different relationships with fintech businesses.
More than three-quarters (82%) of respondents point to partnerships as an alternative to M&A for developing fintech capacity, while more than half (58%) have considered joint ventures. Almost half (48%) look at taking minority stakes, while the same number are prepared to consider in-house R&D.