Fintech M&A Misfortunes Have Lessons for Crypto and AI

Last week, Fidelity National Services (FIS) agreed to sell a majority stake in its Worldpay business to private equity funds managed by GTCR in a deal that values the merchant payments at $18.5 billion.

However, just 4 years ago, FIS acquired Worldpay for more than $30 billion with the intention to revolutionize the industry, but it now raises questions about the rationality of this and other acquisitions in the Fintech space. In the space of 2 years, from 2019 to 2021, we witnessed the notification and quick approvals of mega deals in the acquirers landscape like FIS-Worldpay, Global Payments-TSYS (2019, $ 21 billions) and Worldline-Ingenico (2020, $8.7 billion). Interestingly, Worldline sold Ingenico to a private equity found, Apollo, just two years later, in 2022, for c. $2.7 billion.

At the same time, three important deals took place in Europe that were also meant to transform the PayTech industry, but this time related to account-to-account payments. Mastercad-Nets (2021, $3 billion), Nexi-Nets (2020, $9.2 billion) and Visa-Tink (2021, $2 billion).

Looking backwards, it seems that betting for open banking was a better choice than investing in businesses with obsolete point-of-sales terminals.

However, the fate of some of these deals may also signal other important trends for the future: 1) the shift from growth to profitability in FinTech, 2) the role of synergies and consumer benefits in merger review (and for stakeholders) and 3) possible lessons for crypto and generative M&A.

I. Fintech: From Growth to Profitability

During the pandemic, the Fintech sector experienced unprecedented growth, with soaring valuations, an emphasis on rapid expansion, and little consideration for customer acquisition costs. This approach affected various payment companies, like Adyen, and Buy Now Pay Later firms, such as Klarna, as well as other tech companies like Deliveroo, all of whom sought to amass a large customer base in the hope of reaping substantial returns in the future.

However, the shift in investor focus from growth to profitability following crypto scandals and the collapse of Silicon Valley Bank has caused many Fintech companies to rethink their strategies. This includes exiting certain markets, discontinuing expansion into new territories, workforce reductions, budgetary constraints, and concentrating on retaining loyal customers with high lifetime value (LTV). Consequently, some Fintech companies, including renowned names like Klarna, Revolut, and Monzo, are only now starting to achieve profitability in 2023 after years of mixed results.

This shift in perspective will likely lead to fewer acquisitions as companies turn to organic growth. Conversely, private equity funds may seize opportunities to acquire struggling firms with low valuations in need of financial resuscitation.

II. The Role of Synergies and Consumer Benefits in Merger Review

In merger reviews, companies often tout the synergies resulting from the deal, aiming to convince shareholders and antitrust regulators of the transaction’s benefits for consumers and for the companies themselves. However, the questionable sucess of certain multibillion-dollar acquisitions by FIS and Worldline, which failed to yield promised profits and synergies, has cast doubts on the efficacy of these assertions. While the failed deals did not raise significant antitrust concerns, with only Worldline divesting part of its business to facilitate Ingenico’s acquisition, it is possible that competition regulators may diminish the importance of synergies and consumer benefits in future merger analyses.

III. Lessons for Crypto and Generative AI Deals

As the Fintech sector faces challenges, attention has shifted toward crypto and generative AI industries, leading to a potential wave of consolidation. Companies like Microsoft’s acquisition of generative AI firm OpenAI and Nvidia’s investment in AI cloud operator Lambda Labs exemplify this trend.

However, similar to the Fintech hype, investors’ enthusiasm may inflate valuations of crypto and generative AI companies with untested products and rapidly evolving technologies. While antitrust regulators may not be heavily scrutinizing such deals at present due to companies’ relatively small sizes, important transactions between crypto exchanges may soon warrant closer examination. Therefore, investors are encouraged to critically evaluate the proposed synergies of crypto and generative AI deals, as they may not always materialize as expected.