Evercore is an independent global investment banking advisory firm founded in 1995. Its dealmakers advise clients on mergers and acquisitions, divestitures, restructurings, capital raising, public offerings, private placements, and other strategic transactions. The firm also provides institutional investors with equity research and sales and trading execution, and retail investors with wealth management and trust services.
Evercore has built a leading financial services and financial technology corporate advisory business. Its bankers advised First Data on its pending $40 billion merger with Fiserv, NEX Group on its $5.4 billion sale to CME Group, PayPal on its $2.2 billion acquisition of European payments company iZettle, Actua on the sale of wealth technology provider FolioDynamix to Envestnet, Safe Banking Systems on its sale to payments and compliance company Accuity (RELX Group), optionsXpress on its $1 billion merger with Schwab, and Personal Capital on its $115 million Series E Financing from IGM Financial / Power Financial Corp., just to name a few prominent transactions.
Financial services firms are struggling with digital transformation, disruptive financial regulation, legacy IT systems, and ongoing cybersecurity attacks. As markets are disrupted, M&A can play a strategic role in managing (or sometimes jumpstarting) innovation, and in capturing new sources of growth and revenues. Members of Evercore’s financial services team are the folks I would call for advice on the timing, structure, financing, or pricing of a transaction.
Ken Auspaker is a Managing Director in the financial technology group of Evercore’s corporate advisory business in New York.
Q. Ken, how would you characterize today’s financial technology M&A environment?
A. I’d characterize it as one of the busiest in recent history. I would say that across all industry sectors, M&A is quite active; FinTech is particularly active.
Why? It’s a lot of different things. Public companies have strong stock prices, debt is still relatively inexpensive and available, corporates have record levels of cash, private equity has raised $1.5 trillion over the past three years. On top of that, the public markets have actually been quite receptive to M&A announcements. Partly that’s driven by lower organic growth in many sectors, and M&A is a great way to accelerate growth, enter new markets, and take out costs. Take PayPal when they announced their acquisition of iZettle — their market cap was up around $3.5 billion on the day of that announcement. Historically, acquirer stocks have generally traded down when they announced an acquisition. But in the past few years, that has somewhat flipped, and many acquirer stocks have traded up when they announced a deal.
FinTech has become top-of-mind for both companies in the financial services space and those that have not historically participated in financial services — look at Facebook announcing they’re going into crypto, just to pick one recent example.
Q. Can the good times continue?
A. I wish I had a crystal ball for that. From our perspective it still as active as it has been over the past few years.
Even if there were to be a change in the environment, FinTech is the technology enabling everything we use today in financial services, whether it is bank accounts, credit cards, trading applications, etc. Innovation and M&A in the fintech space will continue. Financial services is really a fundamental need for consumers. FinTech will continue to change how we interact with financial services, and even with each other — take Zelle for example.
Q. What’s most likely to end them?
A. I don’t think there’s going to be an end, so to speak. One could see a slowdown in what really has been record levels of activity, though.
It could be caused by a few different things. It could be a significant increase in interest rates driving the cost of debt higher or a pull-back in lending. It could be a significant downturn in the equity markets causing corporates to feel not that great about their stock prices.
It could be a negative change in the regulatory environment. Some things have gotten easier for financial services from a regulatory perspective (although not all), but if that were to go the other way it would be a bit challenging.
Or, continued political uncertainty, though I would put a caveat on that. One could argue that while we’ve had some substantial political uncertainty in the last few years, it really hasn’t impacted the M&A market.
Q. Broadly speaking, are there notable regional differences when you look at Asia, Europe, and the U.S.?
A. Yes and no. The U.S. has been incredibly active. In Europe, Brexit and other political issues may have caused some acquirers to hold off until they feel there’s more certainty. That being said, deals are still getting done. Take, for example, Intelliflo (portfolio company of HgCapital), who we advised last year on their sale to Invesco. That was a cross-border example of a UK business being acquired by a U.S. listed asset manager.
I’d say in Asia — and more specifically in China — M&A has been more challenged by the regulatory approval process, which really has made it more difficult for Chinese acquirers. Look at Ant Financial and MoneyGram as one recent example.
Q. Has the specter of Brexit caused potential acquirers to look more closely at continental Europe? Are buyers more reticent now about the UK?
A. Even in the UK, 2018 Fintech M&A was very strong, but it certainly has put a damper on some transactions.
Overall in Europe, there is a bit of uneasiness from an economic perspective. There’s just general uncertainty. The UK with Brexit is its own case.
That being said, FinTech innovation is still absolutely happening throughout Europe and the UK. But because of Brexit, I think you will see more FinTech activity and innovation occurring in mainland Europe, where people feel there’s a bit more certainty. But I would put quotes around “certainty”.
Q. You mentioned MoneyGram. With the broadened scope of CFIUS reviews, are Chinese firms no longer viable acquirers of U.S. financial technology firms?
A. Yes and no, but it feels that they are less viable acquirers of U.S. financial technology today than in the past. Ant Financial’s failed acquisition of MoneyGram is one example of regulatory scrutiny faced by a Chinese acquirer. Never say never, but the shine has certainly come off for the current time.
Q. The recent merger announced between SunTrust and BB&T will be the largest banking merger since the financial crisis. Should we expect a wave of consolidation, or is this a one-off, driven by a unique set of circumstances?
A. I would expect more M&A in the banking space. Some of the mega deals in the payment and core banking space are allowing smaller banks to compete with larger banks by providing them with technological capabilities. But there are still a lot of benefits to be realized from bank consolidation. The largest banks are spending billions of dollars each year on technology — a sum which is completely unfathomable for a small bank. Then you have to look at compliance costs, which have also gone up dramatically. That being said, when you look at the regulatory environment, it’s actually a little more favorable to smaller banks more recently, on the margin. Particularly when you are under $250 billion.
Q. SunTrust and BB&T was announced as a merger of equals. Is there ever really a merger of equals?
A. In some situations, yes. Particularly when each company’s ownership is close to 50%. And in cases when there is truly a mixing and matching of the best talent from each organization.
When companies have quite different businesses — when there’s actually very little overlap — it’s crucial to have management from each team remaining at the combined company.
But when you’re combining two similar businesses with significant overlap and taking out a lot of costs, it’s more challenging to do it as a merger of equals.
Q. Are legacy financial technology providers playing offense or defense when they acquire newer FinTech firms, or do you have to judge on a case-by-case basis?
A. It’s a mix. From the offensive perspective, they may be seeking to enter a new market where they don’t feel they have the necessary skills, or maybe they want to expand geographically. Or they may want to acquire a full team via an “acquihire”.
In defensive cases, they may fear being left behind. This often happens when you see smaller, nimbler FinTech companies begin to take share. In cases where you see customers leaving incumbent firms for FinTechs, and there’s an acquisition, that’s an example of where they are acting defensively. It happens when they have the realization, as well, that they’re not going to be able to build that technology themselves.
Q. What distinguishes incumbent firms that are successful at integrating financial technology firms they acquire from those that are not? Are there best practices in integration planning?
A. There are a few things. You need a very well laid out plan from the beginning that takes into account the cultural aspects and desires of the two teams. Financial services are an inherently digital product; they are not making anything tangible in the typical sense, and so the people, as well as the technology, are crucial.
In terms of how you would judge the success of some of these transactions, one thing to look at is how much of the original team of the acquired company is still at the acquirer one year after acquisition. Did the whole team depart after they collected their checks? Or are they helping to drive integration and continued innovation?
One best practice is to have a well-orchestrated strategy so that upon the announcement, all the employees are brought together and all the immediate concerns about the merger can be put to rest. Everything comes out right at the beginning.
When things are done behind closed doors and employees are unsure about the direction of the company, you get a lot of rumors. And those rumors are often actually untrue, but they spread throughout the organization. People spend enormous amounts of time worrying about their jobs instead of taking the organization forward.
Q. They’re redoing their resumes and updating LinkedIn.
A. Exactly. They’re spending all their time doing that and not focusing on the integration.
Another mark of a successful acquisition is how many of the acquired company’s clients remain on the new platform. Often, contracts allow clients to leave if there’s a change in control. One of the best practices around managing this is for the CEOs of the acquirer and target companies to go out to talk to the acquired company’s customers — and potentially the acquirer’s customers, as well — to say, “Look, this is going to be of huge benefit to you because you’re going to have access to all these capabilities that you didn’t have before.” You want to reassure them that they are not forgotten and that your sole objective isn’t to just slash a bunch of costs, after which they will experience a service decline.
Q. I think I’m safe in saying that most FinTech exits are going to be by acquisition, particularly for B2B firms. Relatively few will have an IPO. Given this, what do FinTech boards and CEOs need to be thinking about as they grow? What steps can they take (other than executing successfully, of course) to make themselves attractive acquisition candidates?
A. A few things. Making sure, as you’re building your business, you’re putting in place strong, multi-year contracts with your customers. Everyone likes to see that. And avoid special termination rights if there’s a change of control. That’s very, very hard to do, but you might as well ask for it before you’re being acquired. Otherwise, you’ll have to go out later and get consents from all your customers. The stronger the contracts, the better off you’ll be in an M&A situation down the line.
Concentrate on diversifying your client base from the very beginning. You don’t want massive client concentration if it can be avoided.
Make sure you have all the necessary patents and legal protections in place. The last thing you want to do in an M&A situation is realize you haven’t patented your core technology, or you have legal issues that appear at inopportune times.
And, be able to show that your clients stay with you and grow. You want to show that they’re growing their spending with you every year because they like your service so much. And try to prove out the cross-sell, even if it’s just a little bit.
Q. Paul Graham wrote that startups should only talk to corporate development when they’re either doing really well or really badly. Otherwise, he believes startups talking to someone from a corporate development department are making a mistake. Do you agree?
A. It’s not necessarily a waste of time. Having a discussion with a corporate development team might give you some insight into the things that a particular company cares about. If that company is a good potential buyer in the future, it might be helpful for you to be on its radar, particularly because it takes some companies a really long time to percolate information internally; they may not perform very well if you decide later on to run an auction process and they didn’t know your company in advance.
Also, those conversations may spark ideas about new areas your company might focus on. They may tell you they really care about a particular area of the market and they wish to find a vendor that can provide a specific type of service.
You do have to walk a careful line when it comes to sharing information. Never share financial information, particularly forecasts. If there’s a secret sauce or technology know-how that you might be concerned someone could copy, you likely wouldn’t want to show it to them. But high-level discussions are probably okay.
Q. If you’re a FinTech startup and you are approached about a possible acquisition, what mistakes do you want to avoid?
A. A lot of people will often show up saying they want to acquire you when they’re really looking for an education on your company or sector. You can waste lots of time doing that.
Don’t give them too much detail if your presentation hasn’t been properly vetted by a banker or someone well-versed in M&A to make sure you’re positioned in the right light. Once information is out there, you should assume it is being broadly shared, even in most cases if it isn’t. If it doesn’t position you in the right light, it can be detrimental if you decide to run a process later on.
Q. Can a challenger brand, built around a better user experience for a retail consumer and a feel-good value proposition, survive acquisition by an incumbent firm?
A. Some companies take a VC-like approach and allow the acquired companies to continue to operate under their own brands and from their own offices. Those often can be successful because they get the benefits of being part of the parent organization without a change in the entrepreneurial mindset.
But when you have a small startup brought onto a tremendous corporate platform that requires a change in that mindset, it sometimes can be challenging to the startup, and often many of the employees end up leaving. To the extent that they can continue operating by themselves, while still taking advantage of the benefits of being part of the larger organization, it can be successful. It really comes down to the goals, background, and expectations are of the start-up’s team. If there is alignment, success is often easier. Sometimes a start-up’s founders and employees have prior experience working within a large organization and so the change isn’t that much of an issue.
The best acquirers realize they sometimes need to stand back and allow the company they’ve bought to continue on its growth trajectory. The purpose of buying a company often is to acquire its capabilities and its innovation power.
Q. We’ve briefly touched on payments already. There’s been a lot of activity in this space thus far in 2019. Post these mega deals (FISV/FDC, FIS/WP), how is the space shaping up?
A. I think those deals highlight a few interesting things.
First, merchants have really become much more global — even smaller merchants. They need vendors who can service them on a global basis. From a payments perspective, that means being able to settle contracts or payments in a variety of different currencies.
Second, payments really require the best and latest technology, which requires a tremendous amount of ongoing investment.
Third, vendor relationships are consolidating, particularly at the bank level. People are often seeking one-stop shops, which is what all those deals are highlighting.
Then there’s a growing convergence between banking technology and payments technology.
Q. Let’s talk a bit about the digitization of wealth management and the impact FinTech is having on this vertical. Wirehouses and RIAs are threatened both by rising robo-advisors and by changing demographics, and neither have traditionally been known for their abilities to leverage leading-edge technology. What are the savviest players doing?
A. It’s pretty interesting. This is a space we’ve spent a lot of time in. Large financial services companies are generally slow to move on technology. What’s interesting about WealthTech, following the entrance of robo-advisors, is that it’s been quite different. In that case, most every large financial services company saw the importance of innovation in this space. They saw the need to change the way they interact with customers. Robo-advisors are still relatively small in comparison to the overall wealth management market. However, incumbents saw the importance of digital client interfaces and realized that to remain competitive, they’d need to have all of that technology as well.
There are different approaches. Vanguard launched Personal Advisor Services. They now have the largest robo, with over $115 billion in AUM. BlackRock acquired FutureAdvisor. Goldman bought United Capital. Yes, it’s a wealth management platform but it’s also technology.
The savviest players either have really well-laid-out plans to build technology internally or they’re looking around to see who they’re going to acquire.
Q. What does the future look like for robo-advisors? Is there room for new entrants in 2019?
A. Yes. Particularly in wealth management technology, which is a fairly large but still very fragmented space. But you do need to come in with something of a different shade.
New robo-advisors may have a much broader set of capabilities than the first set out to offer, which was an allocation to a basket of ETFs. Some will add additional products in order to offer a more holistic experience — things like bank accounts and trading capabilities.
But just a plain-vanilla ETF allocation product? I think that’s very challenging.
Q. I spent a lot of my career in the mutual fund industry. Today, there are too many active asset management firms in the U.S. underperforming their benchmarks while at the same time fees are being squeezed, required technology investments are rising, and operating margins are falling. Is engaging in M&A to gain scale and scope a way to escape this existential crisis? Will we end up with an industry of giants and boutiques, with nothing in between?
A. It’s a very interesting question that we debate here internally all the time. There are at least a few examples in recent history of large-scale deals — Invesco-Oppenheimer, Janus-Henderson, Standard-Aberdeen. Even more than most, these are hugely complex mergers. All of your intellectual capabilities walk in and out of the door every day. I think some of these mergers are going to take a bit of time to play out. In theory, there are significant benefits that should be reaped from these deals, whether it be combining overlapping funds, reducing duplicative functions, cross-selling additional products, or being better positioned to provide customers with solutions (which is where the market is moving). But I think it’s a bit too early to judge the success of those big M&A deals.
In terms of competing in the middle, as you mention, it’s certainly challenging. You’re going to be dealing with a lot of new regulations, which is much more expensive than it has been in the past. And, if you look at any of the bigger players, they are investing a lot in distribution. I think you’ll see some of the manufacturers acquiring distribution capabilities, building or partnering for them. As a smaller or mid-tier player, these can be expensive to do on your own.
Q. Asset managers are using more alternative data as they search for alpha. Will providers of this data continue to be targets?
A. It depends. If you’re an asset manager, you’re looking for anything that will help you produce alpha. From an asset manager perspective, if that particular piece of alternative data is truly a differentiator for you, you’d likely want to go out and acquire it. But I also think you’ll see a lot of M&A from the traditional data providers looking to provide additional data to the asset management industry. The exchanges and other traditional data providers may want to acquire this alternative data.
Q. Looking at startups that serve capital markets firms, where will we see most near-term M&A activity — front, middle, or back office?
A. You’ll see activity across all three but particularly in back and middle office. Most companies are going to want to own their own front-facing technology. But the back office, that’s where you can see really tremendous synergies. You can often take out an entire cost base either by putting the target’s customers on the acquirer’s platform or — even better — putting the acquirer’s customers on the target’s platform.
Q. What’s the relative importance of the exchanges, other market structure providers, and private equity to startups looking for an exit in this space?
A. I think the exchanges have been quite active as acquirers across both the data and the capital markets infrastructure spaces. Take a look at Nasdaq, Intercontinental Exchange, London Stock Exchange. They’ve all done very sizable deals, either acquiring data assets — whether it be indices, data sets, or data providers. In the market infrastructure space, too, they’ve been pretty active acquirers. If you look at ION Trading, for example, they’ve acquired Allegro, Fidessa; SS&C has made acquisitions both in the data and capital markets space. On the private equity side, they will be big acquirers in general over the next few years as well, given that they’ve raised over $1.5 trillion. That’s a lot of dry powder.
Q. There are quite a few blockchain startups that have raised a few million dollars or euros to address back-office infrastructure, risk management, insurance delivery, options trading, and the like. They have successfully completed PoCs, but enterprise deployments at scale seem a long way off. What do you expect to happen here?
A. Utilization of blockchain overall is in very early days. It’s an important focus for any financial services company we talk to. Most everyone has some type of pilot going on.
The Australian exchange was one of the earliest to truly implement a large-scale blockchain project in a commercial way, where they are in the process of replacing CHESS, their core processing system, with a distributed ledger. People are still evaluating how this is working out and whether or not it will result in cost savings or other efficiencies.
Q. Do you expect to see FinTechs that reach critical mass begin to deploy inorganic growth strategies? In any sectors in particular?
A. I think some FinTech companies absolutely will be acquirers in the space, and many are already. They won’t be looking to buy growth, necessarily, but looking to add complementary capabilities. Look at Plaid, which recently acquired Quovo.
Q. As one of the smartest people I know observed last year, “What has happened to banks and payments and asset management is now coming soon to a theater near you, if you’re an insurance company.” Is that time now?
A. Yes. The last few years have seen startups in the insurance space, particularly targeting distribution. Trying to make the experience of purchasing insurance more customer centric, akin to what’s gone on in the asset management space with robos. The next wave is InsurTechs helping to digitize incumbent insurers. There’s a bunch of fairly sizable companies doing this today.
The time really is now because of the experience people have with Amazon and others on the consumer side and some of the pressures insurance companies are facing from a cost perspective.
Q. How should incumbent carriers respond to the wave of innovation coming their way?
A. They should embrace it. It truly will allow them to better serve their customers while at the same time actually reducing expenses.
Many carriers have already made investments across this space. For instance, Zurich has invested in CoverWallet; Chubb in CoverHound. Carriers have come to the realization that they need to innovate and many of these startups provide very innovative tools and approaches.
Q. On to RegTech. What are the key areas of focus?
A. It’s a broad category. RegTech means a lot of different things to a lot of different people. AML and KYC are incredibly important, particularly in banking and payments. This is something which is quite challenging to do right. If you think that you pick up a list and then run a comparison, that is very far from what actually needs to happen. You need a lot of work around linkages between parties to really understand the customer you’re intending to serve (or are already serving).
Another area where I see a lot of focus is workflow, which is incredibly important to financial services given the amount of regulatory change we’re seeing.
Keeping pace with changing regulations is a key area of focus that, even within large financial services companies, historically has been ad hoc. They’re looking at what law firms have put out online, they’re talking with each other, but often they’re not taking a systematic approach to managing regulatory change. But there are several companies now offering products that allow compliance teams to utilize their technology in this important area.
Q. How will FinTech change investment banking?
A. It’s all about efficiency of process. FinTech will allow bankers to spend more time on the things that actually matter. When I started in investment banking in 2004, I was working with paper data rooms. I remember sitting in a lawyer’s office with papers in tons of boxes and reorganizing the documents every day. I felt this was so very inefficient, so I actually decided to scan every document for that project and put the data room on a CD. Not quite the digital data room of today, but getting there.
Today, we use tools such as virtual data rooms as a way to create that efficiency. Some platforms help digitize the due diligence process, but the majority today still require files going back and forth between firms.
Q. Let’s say I have a FinTech startup and grow it through seed, A, B rounds, and onward. At what point should we get to know each other?
A. We like to get to know people as soon as they start getting some traction with clients, which is typically near your Series B or C round. We like to really get to know their value propositions and we’re happy to help them by providing advice along the way. We can bring real value when we really, truly understand a company and how the management team thinks about the business and the environment. That doesn’t usually happen when you try to get to know them during a few weeks leading up to a process.
Q. How should potential acquirers and acquisition candidates contact you?
A. By email is fine. Thanks.
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