It is clear from our research that fintech investment is set to remain buoyant – investors and acquirers of all shapes and sizes express a desire for greater fintech exposure and capacity across a broad range of sectors and regions
While there will naturally be ebbs and flows in relative levels of demand, as new technologies emerge and evolve and regional factors come into play, overall appetite for fintechs will only increase.
Nevertheless, acquirers and investors need to be strategic as they target fintechs that represent a good fit for their own business. “Too many acquisitions are wasted – a lot of companies acquire something they may not fully understand and are unable to properly implement,” warns Reed Smith’s Maria Earley. “It’s not as easy as simply taking a system and replacing it, and integration is often costlier and more complicated than anticipated.”
Reed Smith’s Herb Kozlov also urges acquirers and investors to be circumspect. “Successful deals share two common traits,” he says. “First, integration does not start the day the deal is complete – it’s something you’re considering and exploring at every stage of the transaction. Second, human capital is crucial, because that’s a crucial part of what you’re buying with the technology – everyone’s interests need to be aligned.”
In these contexts, our research provides some key takeaways for both would-be investors and fintechs to consider:
1 Don’t follow the flock
The payments sector is a clear priority for many investors in fintechs, but other sub-sectors will see plenty of action too. Don’t just look at the “next big thing”. It is imperative to align targets with the business imperatives facing the organisation, identifying solutions and skills that an acquisition could provide.
2 Broaden your horizons
While deal activity is expected to increase around the globe, competition is expected to be hottest in Europe over the next 12 months, followed by North America. But investors and acquirers should not overlook the potential of fintechs in developing markets.
3 Hunt for bargains
Valuations vary in part according to what is fashionable, but this can create opportunities too. For example, while valuations of fintechs involved in distributed ledger technologies related to cryptocurrencies have soared as interest in this area has mushroomed, the broader applications of this technology may ultimately be more valuable; yet fintechs engaged in this work are currently priced more cheaply.
4 Don’t be put off by Brexit
The UK’s secession from the EU will undoubtedly create uncertainties for investment but most respondents believe it would be a mistake to neglect this market given its long-term attractions.
5 Stay open-minded about fintech targets
Deal drivers for fintech acquisitions and investments vary according to the target company, but it will be important to remain open-minded and imaginative about M&A strategy. While some fintechs offer exciting opportunities to drive top-line growth, others will offer benefits such as cost synergies, operational efficiency and improved regulatory performance. For example, digital ledger technology companies may provide innovative compliance cost reductions and efficiencies.
6 Do your diligence
Acquirers and investors must prepare carefully for a deal. They may need to invest in resources that provide them with the means to make more accurate technical assessments of targets’ technology and to integrate those technologies once the deal completes.
7 Study the competition
Dealmakers will need to be ready to move quickly, and to recognise that rival bids may come from unexpected sources, including businesses outside of the traditional financial services sector.
8 An early integration plan is imperative
Deals are unlikely to be successful in the long term without a clear plan for integration – would-be investors and acquirers must begin work on integration planning well before completion.
9 M&A is not the only transaction
Collaborations including partnerships, joint ventures and funding support for fintech start-ups may also produce good results; nor should in-house R&D be neglected.