Financial Information and Technology Trends
The Financial Information and Technology (FinTech) sector of the economy has shown signs of growth, despite the reluctance for a true recovery to emerge. Yet there remain signs of substantial economic improvement as revenue, operating profit, and M&A transactions have all increased within the sector. For instance, in the first half of 2010, there has been a 31% increase in the number of transactions and a 248% increase in the value of transactions versus the last six months of 2009. This growth has pushed multiples up, with the average revenue multiple challenging the 2007 highs of 2.3 and the EBITDA multiples approaching 2007 of about 16.0.
Strategic buyers have led this growth, completing approximately 83% of the total transactions, and in turn representing approximately 56% of the total transaction value within the sector.
While it is not perfectly understood why smaller companies are selling – two thirds of all deals were below $245 million -we have heard that the timing of such sales is heavily predicated upon entrepreneurs’ calculated avoidance of next years’ higher capital gains tax and the recent rise in multiples.
Payment processing companies have received a fair amount of attention from buyers, with online and mobile payment processing and automation have both seen several significant acquisitions: Visa, Inc.’s acquisition of CyberSource, TPG Capital’s acquisition of Vertafore, Inc. and Jack Henry’s purchase of iPay Technologies, Inc. The payment automation and processing space may be consolidating due to the appearance of over-capacity and the need for more efficient end-to-end online and mobile processing systems.
On the capital markets side the trend appears to lie in the consolidation of research providers and push into social media. Of the 44 deals in capital markets, roughly 20% of them were in research: Morningstar purchasing Old Broad Street, Aegis and Realpoint, followed by MSCI’s purchase of Risk Metrics and FactSet’s acquisition of MarketMetrics. We expect to see continued consolidation in a market where small companies vie for rare discretionary funds and large companies refocus after their Global Settlement moratorium.
Alongside of the research trend, we see FiServ’s acquisition of Advice America, an online collaborative offering in wealth management, as a pivotal turn in wealth management industry. Technology providers will continue to add social media and web 2.0 collaboration tools to round out their more traditional solutions to improve both customer relations and efficacy of programs. MarkIt’s acquisition of Wall Street On Demand may also be a sign that collaboration tools (one of their offerings), rather than CRM providers, will continue to gain relevance within wealth management and retail brokerage.
Admittedly, it may fall short of a bona fide trend, but we nonetheless see continued demand for compliance information and tools. It is our opinion that Complinet, a recent purchase of Thomson Legal and Regulatory, will be utilized to help strengthen ThomsonReuters already powerful position in the capital markets.
On the banking side, an overwhelming need of process automation will drive acquisitions. Banks and technology service providers are seeing value in process automation systems as demonstrated by the recent acquisitions of Speranza, Equifax, NextStep Technologies and Inmatrix. We believe banks will continue to seek operating efficiencies in the post – financial reform marketplace.
In addition to banking automation, new mortgage technologies will continue to be developed and attractive to buyers, including analytic programs helping both mortgagors and service providers manage defaults.
Although not reflected in recent activity, we see an increasing appetite for mobile applications in the Capital Markets. Companies such as ThomsonReuters, Bloomberg, IDC, FactSet, Morningstar, CaptitalIQ, SunGard, Fidelity, TD, Scottrade, IPREO and Dealogic among others will need to establish a more ubiquitous platform, providing the user the ability to gain increased levels of information on Blackberry, Iphone and other smart phone devices. With the recent rise in smart phone adoption, increased usage and greater levels of wireless connectivity it seems only sensible that mobility in financial services correlates with the broader trends.
At the core of our observations lie a few trends:
- We believe that research providers will continue to be consolidated at compelling values, with companies like Morningstar and FactSet leading the charge.
- We believe that the capital markets will continue to seek solutions that help professionals communicate with their clients.
- With relation to banks, we see a continued push toward technologies that streamline processes, eliminate paper and help remove redundant costs.
- Although not evident in recent activity, we feel as though strategic and private equity sponsors will continue to invest in multi-asset class, ultra-low latency platforms, with FX, futures and commodity trading platforms leading the way.
- We expect Asian FinTech companies to become highly competitive in the U.S. and EMEA with the continued diversification of assets from the U.S. to Asia.
If you would like to discuss the information in this article, receive a more detailed report or discuss market opportunities you can reach Christopher Young, Managing Director of M&A at Berkery Noyes at Christopher.young@berkerynoyes.com or phone 646-442-7998.
