25 September 2020 - Post by:William Samengo-Turner
After a run of high-value deals at the start of the year, fintech M&A has dramatically slowed. What will dealmaking look like in the future?
For investors in the fintech market, the contrast could not have been more stark.
In the first quarter of 2020, financial institutions, financial sponsors and mature fintech companies generated a series of increasingly high-value deals.
Among them we saw:
- Visa buy fintech start-up Plaid for USD5.3bn;
- Morgan Stanley acquire E-Trade for USD13bn;
- Worldline buy its payment services rival Ingenico for USD8.6bn; and
- Intuit take over the personal finance portal, Credit Karma, in a USD7.1bn cash deal.
As we enter the final quarter of 2020, the picture has changed.
As the Covid-19 pandemic took hold across the world, fintech transactions went into rapid decline, mirroring the pattern of steeply falling deal activity across almost all sectors and regions.
Listed fintech companies, which had comfortably outperformed the S&P 500 and Nasdaq before Covid-19, were significantly undershooting these indices afterwards. Similarly, those fintechs whose businesses focus on sectors which are hardest hit, such as travel or entertainment, have suffered disproportionately.
In reality, the impact of the crisis on this historically vibrant market is more nuanced. There were noticeable changes in sentiment even before the pandemic.
Traditional banks and financial institutions were already expressing concerns about over-inflated valuations in the sector.
Venture capital funds, which have poured billions of dollars into the sector in recent years, were also taking stock and reining back investment. Indeed, Q1 2020 was the worst quarter for VC fintech investments since 20171.
Against a backdrop of rapidly rising valuations, we were beginning to see potential investors switch to other strategies. With the Buy option looking increasingly pricey, the focus was already shifting towards Build (developing fintech solutions in-house) and Collaborate (forming alliances, or partnering with promising start-ups through joint ventures or, more likely, through minority investing).
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