ETA Expert Insights: Mergers and Acquisitions in 2020
By Ajit Prasad, TSYS; Shawn Silver, Payment Cloud; Karen Whiteley, C&H Financial; members of the ETA Payment Sales and Strategy Committee.
2019 was a banner year for Mergers & Acquisition activity in the Fintech space, especially for mega mergers such as Global Payments acquiring TSYS ($21.5B), FiServ purchasing First Data ($22B), Worldpay being acquired by FIS ($35B) and Ingenico being acquired by Worldline ($8.6B) . In addition to these large deals, there were smaller mergers too numerous to mention. A previous article, “Mergers and Acquisitions Checklist for ISOs and Acquirers” was published on Jan 24, 2019; this article will primarily focus on M&A impact to the MLS or ISO.
More than likely, your day-to-day contact will hear of the merger only a short time before you learn of the transaction via the newswire. Realize your contact has a limited set of information and typically will be speaking from a set of fixed talking points. As the merger unfolds, be sure to take advantage of any seminars, calls or other information as it becomes available. Not only is it a good time to be informed, it is an opportunity to meet with those involved and hear the story from the direct source. It’s to be expected that your contacts in the company may change as the merged entities go through organizational changes. To keep informed it’s important to build networks at both companies – attending webinars, conferences helps to build this rolodex. In the months following the merger, there will be a lot of uncertainty and rumors – it is normal for both your organization and your upstream partner to feel anxious. Be patient and try to validate news from several sources. The key here is not to make a hasty decision that your company will regret later, such as signing a new deal with poor terms.
One of the concerns ISOs and MLS have is whether the contracts will be honored by the new entity. Generally, the contracts are still in force as the merged entity is looking to grow and not reduce business. In some cases, either the newly merged entity or the seller may offer a buyout to the ISO or MLS prior to the execution of the sale. The ISO or MLS may see this as an opportunity to negotiate the amount of the residual buyout and request a higher multiple. However, the offer made by the seller is based on the terms of the sale of the entire portfolio and usually not negotiable. If the ISO or MLS chooses to execute the buyout, they should carefully review any attrition requirements. Note that a change in residual payment cycle due to operational needs may or may not be seen as a change in the agreement. As a matter of course, a prudent owner should have the contract reviewed by an industry attorney or consultant to determine if the merger triggers any adverse actions.
Strategically, the merger may open some doors while closing others. One area to consider is the distribution channels used by the new entity. It’s possible that your ISO’s channel, which was long neglected, may get attention as it’s a growth focus for the combined organization. Conversely, a solution that you’ve been offering for years could become proprietary if the new entity decides to take it in house. Another strategic consideration could be that the acquiring party brings a new sponsor bank to the relationship. This could result in an expanded geographic footprint or enable new domestic verticals due to a change in the credit policy. Finally, the branding of the newly merged entity may change which may result in positive or negative market connotations. In each of these situations, your sales and back office functions should be ready to take advantage of the situation.
It would be remiss to overlook or minimize the impacts of COVID-19. Near term, consumers and business are spending less, resulting in reduced income to most payment companies, especially those in the card present space. During the pandemic, it is expected the pace of larger M&A activities will reduce as companies focus on their core business. However, for companies with strong balance sheets or access to cheap capital, 2020 could be the time to make opportunistic acquisitions for significant savings. These could be technology partners, portfolios or targets in a new vertical.
In summary, remember the phrase, “With change comes opportunity”.