Payments 2012: Hindsight to Insight
In terms of mergers & acquisitions (M&A), the payments (PMT) industry[1] is very active right now. These are exciting times for potential buyers and sellers. Deal values have risen, the number of transactions completed has increased, and most importantly, revenue and EBITDA multiples have fully recovered from the downturn in 2009. Large corporate acquirers, well aware of the industry’s changing landscape, are looking to acquire innovative and successful firms.
Berkery Noyes & Company LLC (BNC) has been closely tracking the PMT industry over the past three years. From 2008 to 2011, BNC recorded 242 M&A transactions. Compared with 2009, the number of transactions in 2011 and 2010 were up 38% and 73%, respectively. VeriFone, the most active PMT acquirer during this timeframe, completed eight transactions.
The total value of these 242 PMT deals was $29.92 billion. Relative to 2009, transaction value in 2010 and 2011 improved 167% and 267%, respectively. Advent International Corporation was the largest acquirer by value, paying $5.04 billion. The buyout firm acquired Card Systems and Identity Divisions from Oberthur Technologies, Prepaid Platform from Springbok Services, National Processing Company, RBS WorldPay, and Payment Processing Unit from Fifth Third Bancorp.
Transactions valued between $150 and $500 million (mid market) received the greatest median EBITDA multiple, which was 15.5x. Transactions valued less than $150 million (small-cap market) and greater than $500 million (large cap market) received lower median EBITDA multiples: 8.3x and 12.5x respectively.
In contrast to 2009, median EBITDA multiples in 2010 and 2011 were up 51%. Median revenue multiples in 2010 and 2011 were up 80% and 86% from 2009, respectively. In addition, Private Equity buyers completed 14% of all transactions yet paid the highest per transaction value.
M&A activity continued at a robust level in 2011. The most active acquirers by volume were Fiserv with three transactions and VeriFone with four. Fiserv purchased Maverick Network Solutions, CashEdge and Mobile Commerce. VeriFone purchased Point Transaction Systems AB, Global Bay Mobile Technologies, Destiny Electronic Commerce Pty, and Point of Sale Solutions Business from Gemalto.
Total transaction value for 2011 was $11.26 billion, an increase of 19% from 2010. Barclays PLC completed the largest PMT transaction for the year when it purchased select assets from Egg Credit Card Unit, a subsidiary of CitiGroup, for $3.20 billion.
Upon further inspection, the top ten M&A transactions had a combined value of $8.86 billion, which comprised 79% of all completed M&A transactions in the space. Although the top ten deals encompassed 79% of the total completed M&A transactions in terms of value, the small-cap market constituted 89% of the total transaction volume.
Value Drivers
The discussion so far has centered on transaction values and valuations from an aggregate perspective. From a decentralized viewpoint, individual players in the PMT industry who are commanding high values tend to possess one or more of the following characteristics: (1) the “Dictator Effect;” (2) “Simultaneous Demand;” (3) “Product Extension into Underserved Niche Markets;” and (4) “Leverage Established Infrastructure.”
The “Dictator Effect” is achieved when participants control wide bands of infrastructure and markets. A player must have the power to dictate standards and payment types. For example, large incumbent participants who controlled railway system access, banks and mobile firms in Japan successfully launched and established the Suica market standard for public transportation payments. In this particular case, the large incumbents controlled all three of those components.
“Simultaneous Demand” refers to a participant who offers an option that fully satisfies the demands of both consumers and merchants. Consumers are reluctant to adopt new technologies if the value for them is unclear. For instance, the benefits of a contactless card may be clear for issuers, networks and merchants, but its advantages over swipe cards is marginal and hardly sufficient to induce the most crucial change, a shift in a consumer’s purchasing behavior. On the other hand, a value added payment model, such as that provided by Starbucks, allows customers to pay with a registered prepaid card through a mobile application. The consumer is rewarded with free drinks, add-ons and promotions.
Product extension into underserved niche markets is often a major source of value growth. Currently, Square is a provider of mobile Point of Sale (POS) acceptance equipment, which is providing simple and cost effective solutions that meet the demands of the rapidly growing mobile vertical of the PMT industry. Meanwhile, online social networks such as Facebook and Zynga are driving innovation through multiple payment offerings. These include virtual currency, credit and debit payments, social network currency, pay by mobile and prepaid gaming cards.
Leverage established Infrastructure due to the high fixed costs of building a scalable, secure and convenient payment infrastructure. The majority of successful payment providers have therefore chosen not to build new infrastructure systems, but rather leverage ones already in existence. For example, instead of competing against banks, Alipay partners with them for clearing and settlement as a means of running a large payment platform that processes cross-border online transactions.
New payment offerings rarely succeed, which proves a better method of paying does not guarantee success. Looking back on the dot-com bust, fewer than 400 payment start ups came and went. It should therefore not come as a surprise that many essential factors are often overlooked. Companies with the highest values tend to demonstrate at least one of the four qualifying features discussed above.
What the Future Holds: 5 Key Insights
Mobile PMT (M-PMT)
There are several important, nascent trends shaping the industry. For instance, mobile payments (M-PMT), demand in emerging markets, strategic partnerships and regulations are heavily influencing valuations and growth projections.
Mobile payment transactions are considered to be at a tipping point. According to IE Market Research, the global volume of M-PMT’s is expected to grow from $37.4 billion in 2009 to over $1.13 trillion in 2014, a compound annual growth rate (CAGR) of 94.8%. In addition, the number of mobile payment users worldwide is expected to increase 38.2% from 2010, surpassing 141 million in 2011 (2.1% of all mobile users worldwide), and reach 1 billion by 2014. The low percentage of users of M-PMT’s relative to the amount of mobile device users shows the rapid potential for growth.
Success in Established & Emerging Markets
There are significant differences between developed and emerging markets pertaining to regulation, technology standards, and consumer demands based on the relevance of existing payment models. Success is attained when new players within an emerging or established market modify their business models to reflect marketplace differences. For example, in the case of mobile payments, smart phone technology is being used in developed markets while emerging markets are focusing on SMS-based technology to fulfill very basic payment needs that were once unattainable due to a nonexistent payment model.
New Entrants and Strategic Partnerships
The development of M-PMT’s has altered the actions of key stake holders, a category that includes mobile network operators (MNO’s), handset manufacturers (OEMs), technology providers, and power players such as Google and Apple. There has been an emergence of strategic partnerships shaping the industry’s future. ISIS’ payment network consists of MNO’s like Verizon, AT&T and T-Mobile, as well as electronic payment networks such as Visa, Mastercard, Amex and Discover. Another example is Google Wallet, a strategic partnership of Mastercard, Citi, FirstData, and Samsung.
Regulation
Merchants have expressed concern over the rising cost of swipe fees that the Federal Reserve enacted under the Durbin Amendment, a provision of Dodd-Frank that went into effect on October 1st, 2011. Regulation II regulates interchange transaction fees, giving banks and electronic-payment networks such as Visa and Mastercard the power to determine the cost of swipe fees and rules for payment card transactions. Due to Dodd-Frank’s costly regulations, a new signature payment network will most likely emerge that would be cheaper for merchants to accept payments. The new network will develop from the rising demand within mobile payments. Past history shows that an alternative network will replace existing networks if the former provides similar or better services, as with email versus traditional mail and mobile phones versus landlines.
Lower Cost Service Providers will Win
Despite lingering economic uncertainty, there appear to be several signs of an upturn in consumer confidence and spending in the United States. Nonetheless, there is a high likelihood that consumers will move away from high-cost banking payment services to lower cost ones. Consumers and merchants will adjust their financial behavior and use of credit in response to industry events such as mobile payment alternatives and rising service fees. To circumvent higher fees, many consumers and merchants will seek new providers, or in some cases shun traditional banks altogether. According to an unidentified business source, “for business to business transactions of $5,000 or less, PayPal was a better option than a bank. The payment was faster, the cost was less, and was more convenient.”
It appears as though the PMT industry will remain exceedingly active in the near-term. This predicted level of activity is based primarily on the continuation of growth in mobile platforms, and by the integration of mobile with online and traditional landline offerings. The participants that meet the aforementioned drivers of demand will be the long-term PMT winners. Berkery Noyes & Company LLC believes the robust level of M&A activity and strong valuations for PMT companies looking to buy or sell will continue over the next 24-48 months.
For more information on exit and growth strategies pertaining directly to your company, please contact Christopher Young at Christopher.Young@berkerynoyes.com or via phone at 212-668-3022.
Christopher Young is a Managing Director in Berkery Noyes’ Financial Technology and Information Group. He earned his MBA and Ph.D. from Rutgers University.
Justin Sheerin is a Market Research Analyst at Berkery Noyes and assisted with the compilation of this white paper.
[1] BNC defines the payments industry as payment processors, which includes credit and debit card networks, money transfer firms and prepaid card service providers, financial institutions, merchants, acceptance locations, mobile network operators (MNO’s), handset manufacturers (OEMs), technology providers, and consumers.
