The Changing Landscape of Mergers and Acquisitions in the Fintech Industry
Introduction
Mergers and acquisitions play a significant role in the dynamic fintech industry, where companies seek opportunities to consolidate their positions, expand their customer base, and achieve cost synergies. One recent example of this is the merger between Fidelity National Information Services (FIS) and Worldpay. However, the valuation of Worldpay has faced a significant decline in just a few years. In this article, we will explore the implications of this merger and the challenges faced by the fintech industry as a whole.
The FIS and Worldpay Merger
In 2018, FIS merged with Worldpay, valuing the latter at an impressive $43 billion. However, only four years later, FIS announced the sale of a majority stake in Worldpay to private equity at a much lower valuation of $18.5 billion. This drastic decline in valuation has raised concerns and highlights the changing landscape of mergers and acquisitions within the fintech industry.
The Declining Valuation Multiple
When FIS merged with Worldpay, both companies had experienced acquirers who believed in the potential of income synergies. Income synergies are achieved when the merging companies can effectively cross-sell their products to their respective customer bases. However, the anticipated benefits of income synergies often fail to materialize, leading to skepticism from investors and the broader market.
Worldpay’s annual EBITDA at the time of the merger was around $1.8 billion. This implies that the valuation multiple of the business has plummeted from 24 times to 10 times in just a few years, reflecting a significant decline in market confidence and perceived value.
The Role of Income Synergies
Income synergies are often a key driver behind mergers and acquisitions in the fintech industry. In the case of FIS and Worldpay, both companies aimed to achieve $700 million per year in improved EBITDA through cross-selling and cost-cutting measures. However, the results fell short of expectations, indicating the challenges companies face when attempting to leverage income synergies to drive growth and profitability.
Fintech Industry Challenges
Wall Street has started taking a skeptical view of the fintech industry, which was previously considered dynamic and promising. While companies like FIS specialize in back-office payment processing software for banks, others like Worldpay provide payment processing services for retailers. However, these companies have struggled to replicate the growth, profitability, and capital efficiency of the best enterprise software companies.
The Implications for Stakeholders
The declining valuation of Worldpay has had significant implications for stakeholders, including shareholders and backers of FIS. The 2018 deal was primarily in FIS stock, and initially, the shares performed well. However, since then, the shares have fallen by 60 percent. This decline has resulted in pain for previous Worldpay shareholders and highlights the risks associated with mergers and acquisitions in the fintech industry.
The Importance of Due Diligence
As the fintech industry faces increasing scrutiny and skepticism, due diligence becomes crucial for investors considering mergers and acquisitions. The need to thoroughly assess the potential risks and benefits of such transactions cannot be overstated. Reinforcing this idea, Lex recommends the FT Due Diligence newsletter, a curated report on the world of M&A.
The Future of Mergers and Acquisitions in Fintech
The challenges faced by FIS and Worldpay in their merger highlight the complexities of the fintech industry. It is important for companies to reevaluate their strategies and approach to mergers and acquisitions to ensure a more sustainable and successful outcome. This includes a deeper focus on market research, due diligence, and finding more reliable sources of growth and profitability.
Conclusion
The fintech industry is evolving at a rapid pace, and mergers and acquisitions are a key strategy for companies seeking growth opportunities. However, as demonstrated by the FIS and Worldpay merger, valuations can change dramatically in a short period, reflecting the challenges faced by the industry as a whole. By understanding the implications of such transactions and the broader challenges faced by the fintech industry, stakeholders can make more informed decisions and navigate the evolving landscape with greater confidence.
Summary
The Fidelity National Information Services (FIS) merger with Worldpay, once valued at $43 billion, faced a significant decline in valuation, with a majority stake sold to private equity at $18.5 billion. The challenges experienced by both companies highlight the difficulties faced by the fintech industry, including the failure to achieve income synergies and the skepticism of Wall Street towards the industry. The declining valuation of Worldpay has had implications for stakeholders, and due diligence becomes crucial for investors in the evolving fintech landscape. Companies must reevaluate their strategies and find more reliable sources of growth and profitability to navigate these challenges effectively.
—————————————————-
| Article | Link |
|---|---|
| UK Artful Impressions | Premiere Etsy Store |
| Sponsored Content | View |
| 90’s Rock Band Review | View |
| Ted Lasso’s MacBook Guide | View |
| Nature’s Secret to More Energy | View |
| Ancient Recipe for Weight Loss | View |
| MacBook Air i3 vs i5 | View |
| You Need a VPN in 2023 – Liberty Shield | View |
Receive free updates on mergers and acquisitions
we will send you a myFT Daily Recap email rounding up the latest Fusions and acquisitions news every morning.
The sum of 1.8 billion dollars does not go as far as before. Just four years ago, Fidelity National Information Services, known as FIS, merged with another fintech, Worldpay, valuing the latter at $43 billion. On Thursday, FIS said it would sell a majority stake in Worldpay to private equity at a valuation of $18.5 billion.
Worldpay’s annual ebitda at the time of both transactions was around $1.8 billion. This implies that the valuation multiple of the business has plummeted from 24 times to 10 times in the space of a few years.
Both companies were experienced acquirers. That trust encouraged the couple to combine in a union that relied heavily on dreaded “income synergies.” The phrase assumes that the products of the merging companies can be abundantly cross-sold to the respective customer bases.
These benefits rarely materialize. Meanwhile, Wall Street has begun to take a skeptical view of the previously dynamic fintech industry.
FIS specializes in back office payment processing software for banks. Worldpay, once a branch of the Royal Bank of Scotland, provides payment processing for “merchants” or retailers. The companies said that by the time they join forces, they could achieve $700 million a year in improved Ebitda thanks to cross-selling and cost cutting. Revenue was supposed to grow in single digits.
The combined company’s Ebitda reached $6.2 billion in 2022, a significant advance from the $4.9 billion the combined companies achieved in 2018. However, the pair had projected as much as $7 billion. More ominously, free cash flow was just $3 billion, well below the projected $4-$4.5 billion.
Previous Worldpay shareholders have borne the pain, along with the backers of FIS. The 2018 deal was almost all in FIS stock. The shares were up through 2021. Since then, the shares have fallen 60 percent.
I deal with “synergies” disappointed, for sure. But there has been a bigger challenge. The fintech economics have so far failed to resemble the growth, profitability, or lightness of capital of the best enterprise software companies.
Lex recommends the FT Due Diligence newsletter, a curated report on the world of M&A. Click here register.
—————————————————-