Strategic Maneuvers

Payments companies ramp up M&A activities, seeking to offer integrated and updated services.

By Christine Umbrell

Keeping track of all of the mergers and acquisitions (M&A) activity occurring within the payments space can be a challenge. While M&A in payments has traditionally been cyclical, “it does feel like we are in the more active part of the cycle,” says Jared Isaacman, CEO of Shift4 Payments LLC.

The frenetic pace can be attributed, in part, to strategic decisions by payments companies to add products or services to position their organizations for the future. “A simplistic way of characterizing the M&A transactions in 2018 would be to say that there has been a lot of consolidation,” says Isaacman. “If you look under the hood of each of these acquisitions, though, there is a lot more nuance to it than one big company acquiring another. In most cases, these transactions are strategic in nature and embarked on with the intent of being able to deliver more value at a lower price point as a combined organization.”

The payments M&A “feels more active” right now, agrees Dan Rosen, general partner, Commerce Ventures. “The traditional acquisitions of the past have been very much about adding more processing volume, from either existing segments or by expanding into a new area—maybe more card-not-present, maybe smaller merchants, maybe integrated payments—those are generally the areas you’ve seen M&A historically,” says Rosen. “I think we’re starting to see more interest in acquiring businesses that have truly new capabilities to bring to the table.”

Many companies are buying smaller organizations with a goal of expanding into new channels, delivering new technologies, or exploring new segments, says Greg Cohen, president of Paya and a past president of ETA. This type of organic expansion typically takes a long time and involves a significant amount of risk, according to Cohen.

“So, what we’re seeing—especially with companies that are being bought at premiums—are businesses that service segments or deliver technology that really prepare the acquiring organizations to do battle in the future. They’re acquiring assets that will be very valuable as the industry changes,” says Cohen. For that reason, “you see high valuations around companies that have streamlined boarding processes.” Other companies are seeking to create new modes of connectivity with a future proof gateway, such as TSYS buying Cayan, he says. “You see a lot of the activities around segments or verticals that a business doesn’t currently have.”

Favorable market conditions also help decision-making, according to Cohen. “In a market where debt is very cheap, and companies are looking to grow into higher-growth areas, you’re seeing a frenzy of M&A activity.”

More Thoughtful Consolidation

Peter Michaud, director of project management for The Strawhecker Group, notes a transition from last year—when a lot of the bigger payment companies, such as First Data, TSYS, and Vantiv (now Worldpay), entered back into the acquisition market—to this year, with many current acquisitions involving some smaller players and strategic product acquisition purchases. In particular, he notes TSYS’s acquisition of iMobile3, a Florida-based company that provides private-label, small business solutions and technology services within the payments industry. “And even with TSYS’s purchase of Cayan [completed in January], the value was in the products and platform in addition to the portfolio,” he says.

Chase Merchant Services acquired WePay in December with the goal of bringing integrated payments to software vendors and resellers. Acquiring WePay “was a key part of our strategy to better serve small and middle market clients,” says Kimberly Fitzsimmons, head of merchant services, large corporate sales, at JPMorgan Chase. “We wanted to simplify the process of setting up payments from the get-go, so when a customer is ready to choose the right software to manage their online business, they don’t have to think about making a new system work with it since it is all integrated [and] they can be up and running almost immediately,” she explains.

Rosen describes PayPal’s recent M&A activities as strategic maneuvers to position the company into different segments of the market. “In the last quarter, they made three acquisitions, for a variety of different reasons,” he says. PayPal recently bought fintech companies iZettle, a European startup that sells mobile credit card readers and related payment processing, and Hyperwallet, a company that connects cash networks, card schemes, and mobile money services with domestic ACH networks around the world. It also recently purchased Jetlore, a machine learning technology startup, and Simility, a fraud prevention company.

Isaacman, who previously founded and served as CEO of Harbortouch, was involved in several strategic acquisitions this year to create Shift4 Payments. “When [Harbortouch] had the opportunity to acquire three outstanding POS brands—POSiTouch, Restaurant Manager, and Future POS—and a payment gateway, Shift4—each with a large and loyal installed base of customers—it made a lot of sense,” he says. Once the transition was complete, the company rebranded as Shift4 Payments. “One piece that they were each missing was the concept of truly integrating their software with payment processing. … We believed that by combining these great software products with seamless payment processing, we could deliver a significantly better customer experience at a much lower cost,” Isaacman explains.

Beyond strategic acquisitions, Cohen notes that some companies are purchasing simply to grow in scale. “At the end of the day, a lot of the acquirers, in the back office, basically do the same thing,” he explains. “We board merchants, we take risks, [and] we have call centers and service departments, so you see acquisitions to drive scale, too.” He points to Paysafe’s June acquisition of iPayment, a provider of payment and processing solutions for small- and medium-sized businesses (SMBs), and First Data’s acquisition of BluePay, a technology-enabled payment processor, as examples. “Another example of that would be Global Payments buying Heartland Payments Systems [in 2016] or WorldPay and Vantiv coming together.”

Even with these scale-type acquisitions, Cohen notes that companies are looking at what segments they can bring into the business that don’t currently exist. For example, he says the Vantiv/WorldPay merger gave Vantiv a global e-commerce platform from which to work. And when Global bought Heartland, “it gave them a whole laundry list of software and new segments … that Global had not traditionally been in” within the United States.

“And then you see a lot of M&A continuing around segments—business lines—that [companies] are not currently in,” says Cohen. He points to Global’s acquisition of several software companies as helping to position Global as a software business “as much as it is a payments business,” he says.

All of these moves culminate in a payments space that is moving beyond business-as-usual and toward planning well in advance of market changes. “Companies are going out to buy a new product, or a new distribution route, that hasn’t traditionally been their business model,” Michaud says, and are seeking to expand their market presence and offer more solutions to their existing customers. “They’re getting into a position to expand.”

PE Newcomers

Another trend contributing to today’s increased M&A activity is newfound interest from private equity (PE) investors, according to Cohen and Michaud. “Now we have ISOs that probably never thought about selling before, realizing that it’s a seller’s market out there, and they’re taking advantage of it,” says Michaud. “The influx of private equity capital has been very interesting over the past 12 months.”

PE investors have been not only seeking new acquisition targets but also trying to monetize the payment part of existing investments, according to Michaud. “They’re starting to put a value on the payments component, whereas before they would be focused on the software.”

In fact, Michaud believes all of the recent high-profile M&A activity in the payments space has shone a spotlight on the industry and piqued the interest of PE firms. “The heightened increase of acquisitions that happened … over the last two years really opened people’s eyes to this market that may or may not have been in it before,” he says. Payments outsiders “are asking, ‘Why is Vantiv buying WorldPay for $10 billion? Why is First Data spending $1.5 billion on acquisitions? Why is TSYS spending $1 billion on an acquisition?’ When you get to those numbers, that’s going to open a lot of people’s eyes,” he says. “Now, anyone with a private investment portfolio is looking to monetize payments.”

Cohen cites an increase in “sponsor-backed” M&As. He points to the example of private equity firm GTCR buying payment processor Sage Payment Solutions, which is now Paya. “And you see Pivotal, with a new private equity owner.” The public markets, according to Cohen, have also been very receptive to increased M&A activity.

Michaud sees the new focus on the payments space by private equity firms as a positive for the payments industry. “When capital comes in, that’s always a good thing. When you look at companies like Adyen or Square … you can see how much impact they’ve had on the market.” Investments give companies capital to grow and try to be innovative, he says, “because now you can explore new ideas and expand on them, and you have a lot of leeway to do it.”

Realignment Obstacles

When two companies come together after a merger or acquisition, it can be a challenge to integrate them—but it’s an important area of focus.

Done correctly, the result of a merger or acquisition should mean more services at the same or lower cost, says Isaacman. “Challenges are presented when companies feel that they have to be engaged in transactions simply to stay relevant, as opposed to for real strategic value,” he explains. “This becomes a major concern when companies are more focused on acquiring growth than developing their internal strategy.” He notes that Shift4’s acquisitions have been successful “because they complement strategy that we have been executing on for over a decade, as opposed to alter it.”

“When you do get the opportunity to acquire a great business, focusing on alignment postacquisition is as important as purchase price,” says Isaacman. “It is critical that your new colleagues understand the common objective and are as passionate in the pursuit of it as you are. This can be difficult, especially for legacy management teams who have a history of operating their own way, so having those conversations before signing helps alleviate potential for conflict.”

Patience is necessary, says Michaud. He believes it takes three to five years once a company is acquired to align company cultures—to determine how they will fit together, how the reporting structure is going to work, and how they will approach the market.

Rosen notes that when large companies acquire small companies, realizing all of the intended benefits can often be a challenge. What makes a small company successful is very different than what makes a large company successful. “It can be easy to starve the acquired company of the resources required to be successful and continue to grow within the larger organization,” says Rosen. “What happens more often is that the organizational culture of the larger company ends up pervading the company that gets acquired—and if that’s a good thing, then it’s a successful acquisition.”

Logistics also can be problematic after an acquisition. Cohen points to employee dislocation, as well as customer dislocation, during the synergies process of an acquisition. “But everyone tries to watch out for how to manage that to the best of their abilities,” he says.

In some cases, companies choose to forgo integration and allow an acquired company to maintain some autonomy. “For example, when First Data acquired Clover, it kept it completely separate and maintained the independent culture and nimble approach of not being part of the mothership,” says Rosen. “But most [purchasers] don’t do that.”

In the case of mergers, combining resources can be advantageous to both entities, if they are careful in how they align. For example, with the WorldPay/Vantiv merger, “they are complementary in the sense that there are capabilities and strengths that each organization brings to the table that are additive to the other organization,” says Rosen. “It’s an interesting combination of two businesses that both had reasonably strong positions in different areas.”

Navigating the Future

Payments professionals should understand that M&A can be an important tool for growth, but it’s necessary to proceed with caution, fully informed about future trends. The traditional payments model is evolving toward omnichannel, with integrated, technology-driven, and cloud-based solutions, says Michaud. “It’s becoming a different environment from payment processing in the previous decade.” He encourages payments professionals to be forward-thinking and consider where the payments space will be in five or 10 years. “This is a great opportunity to go forward and seek that investment capital and build those solutions,” Michaud says.

Technology and distribution go together to create opportunities to monetize businesses, says Cohen. “Technology either supports scale or supports distribution. To have scale in any segment today, you have to have a technology differentiator,” he says. “That is very different than 10 years ago, where people monetized their business by reselling terminals or solutions of that sort. Today, technology is a true differentiator in many segments.” He points to what First Data has been able to do with its purchase of mobile payments startup Clover, or what Square has accomplished in the retail SMB market. “Other technologies have helped people in different verticals. Adyen is a perfect example of how it’s helped grow a global e-commerce business. They would not be doing as well in those channels were it not for technology.”

For the time being, the payments industry is a very positive space, with both economic conditions and the popularity of payments foretelling continued M&A activity. “Capital isn’t an issue right now—and that’s always been the hardest thing when you’re trying to innovate,” says Michaud.

“I’d expect to see the M&A activity continue,” predicts Cohen. “At some point, the market has to correct a little bit—we’ve been on a 10-year run—but there is nothing in the short term to slow down M&A,” he says. “The big payments companies need to keep buying, building incremental scale, and moving into different channels. They will continue to acquire assets they don’t currently have—to do battle against the new guys.” They need to adapt to compete against companies like Adyen, Stripe, and Square, he says: “It would take a company a long time to build that, or get in a vertical they want to be in, so they go buy it.”

Rosen believes there is much more room for companies to partner and merge to support technological needs. “There is an enormous need for more software and technology to support next-generation offerings in the payments space,” he says. There is an accelerating transition to digital, and an increasing focus on the value around the transaction, according to Rosen. “So, we think there will be more of those types of enablement opportunities, and more M&A for the large players, which want to have critical capabilities in-house as competitive differentiation.” The focus will be primarily around software, but also include specific capabilities like fraud prevention, loyalty, or e-commerce integration.

Rosen says opportunities also exist around niche or specialized processing. “You might see very specific specialties, like nonprofit or educational payment acceptance, or specialization around health-care payments—that sort of specialization will end up becoming increasingly important.”

Regarding the influx of private equity money into the payments industry, Michaud believes the trend will continue. “Nothing is recession-proof—but payments companies actually did very well and were highly profitable” during the Great Recession 10 years ago, he says. “The payments industry has been very resilient even in down economic times, as its growth comes from various places—including increased acceptance on the merchant side, increased card usage on the consumer side, as well as secular economic trends like inflation.” And there are still areas to be explored and expanded upon, and the possibility for companies to expand into new markets, so “even if the economy were to suffer in some form, payments would still be a very reasonable investment going forward.”  TT