Fintech Focus Rewind: The 1 Thing Every Executive Should Do When Considering Some Sort Of M&A

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The impetus for a deal—be it an investment, acquisition, or something else—shouldn’t just be about money. It should be a meeting of the minds of two businesses.

This is how Michael Maxworthy views mergers and acquisitions in the fintech space.

Maxworthy is a partner at Marlin & Associates, an M&A banker. Maxworthy and his partner Ken Marlin started the firm in 2001, focusing on fintech firms on the lower end of the middle market. Thanks in part to that mindset, they have sold companies to Bloomberg, Morningstar, FactSet and more.

A Look At Fintech M&A

Investing in fintech companies has boomed in recent years. According to KPMG, fintech companies working in banking, insurance and asset management raised nearly $1.5 billion per year in investments from between 2014 and 2017. The U.S. then saw $14.2 billion raised in the first six months of 2018.

As fintech matures as an industry, Maxworthy comes across more and more unique, hard-to-duplicate datasets clients are interested in getting a hold of. Maxworthy said the more intricate these datasets are, the more willing clients become to put capital into M&A.

“The harder it is, the more proprietary it is, the more people think they can get alpha out of it, the more they're gonna pay for it,” Maxworthy said.

Companies like Paypal PYPL are willing to invest $3 billion in M&A opportunities. But when asked why companies often move to make an investment or acquire a business, Maxworthy said these deals are not always motivated by money, but can be due to executives wanting to learn different business models and approaches.

“It’s not necessarily that they're looking to acquire these businesses, but they're looking to see what some of these new up-and-coming businesses [are], their different take on the market, their different take on business models, their different take on how to serve their customer base,” Maxworthy said.

Pursuing an M&A opportunity always involves both financial and strategic factors, Maxworthy said. But companies should always have conversations outside the legal and financial realm to see if the deal is a good match, he said, otherwise it will not work out.

“In some of our cases when we do M&A deals, we advise the buyer and seller to go out without the banker & lawyers involved. Look the guy in the eye, ask him some of the tough questions that you may have thought of during the management presentation and you just didn't get to, or maybe just didn't wanna bring it up in that environment. The bankers and the lawyers, we can sit here and we can financial model all day, and we can legalese as much as we want, but you really just have to have a meeting of the minds of the two businesses, otherwise essentially it's just gonna fail.”

Don’t Only Look At The Big Names

According to Maxworthy, many buyers he works with chase the big names inside the space. He tries to point them to companies who may not have raised as much capital thus far, but could present a better opportunity than the popular names in venture capital.

“[There are] a lot of misconceptions thinking that the higher valued, or some of the companies that have raised significant rounds, are the winners in that market,” Maxworthy said. “We know some of the tier 2, tier 3 players inside that space that may have better technology, may have a more experienced management team, may have a better sales pipeline. It's just a lot of people just don't know that because they haven't raised a lot of money, or they haven't been out there banging their drum on the sales team.”

Currently, capital markets, bank technology, and governance, risk and compliance seem the most ripe for M&A opportunities to Maxworthy.

Merging And Acquiring The Future

Moving forward, Maxworthy said he sees bigger deals selling off divisions and more deals coming from the lower end of the middle market.

“You're gonna see a lot of divestitures, where maybe ICE] doesn't need a certain division of IDC and I think that there's a huge amount of dry powder in the private equity sector that are just waiting on the sidelines to dig into stuff like that,” Maxworthy said.

“A lot of these deals I think are gonna be in the lower end of the middle market, probably deal-flow or transaction size under half a billion, maybe under 750. I think that there are so many overlooked businesses inside that space that there is a feeding frenzy for good companies when they do come to market.”

Listen to the full podcast episode below.