Is M&A the Golden Ticket to Fintech Growth?
Welcome to the sophomore episode of Global Fintech Buzz, where we provide forward-looking analysis for Fintech CFOs and professionals. This episode of our newsletter delves into how fintech companies are expanding through strategic mergers and acquisitions.
In the developed markets, Visa Inc., a leading payments company, agreed to acquire Brazilian fintech platform Pismo in June 2023 for $1 billion in cash, signaling renewed confidence in Latin America during a funding slowdown. The deal marks the most significant fintech exit in the region since Nubank’s late 2021 IPO and stands as the largest disclosed startup exit this year. Notably, this acquisition represents Visa’s first major takeover since 2021, when it acquired European open banking platform Tink for $2.2 billion and British cross-border payments provider Currencycloud for $963 million.
The company has actively sought to enhance its growth organically and through strategic acquisitions, focusing especially on companies with advanced payment technologies. Visa’s strategic acquisitions have facilitated entry into new sectors such as bank account fund transfers, mobile banking, and payment integration. Additionally, certain acquisitions have contributed to the consolidation and enhancement of the company’s current business portfolio.
Visa acquired Verifi in 2019 to seamlessly incorporate its technology into its existing risk management services. Concurrently, Visa expanded its portfolio by acquiring Earthport, a leading automated clearing house network globally, for $223.4 million. The acquisition enabled Visa’s clients to leverage the platform for facilitating international money transfers through bank accounts, businesses, and individuals worldwide.
Source: Company’s Financial Statement
An analysis of the company’s fundamentals reveals a consistent upward revenue trajectory Following the acquisitions of Verifi and Earthport in 2019, revenue surged by 11.49%. Despite a -4.92% decline in 2020 attributed to COVID-19, the company achieved its highest five-year revenue growth of 21.59% in 2022. This exceptional growth can be largely credited to the company’s dedication to enhancing its digital products and strategic acquisitions over the past half-decade.
Furthermore, the company’s economic profit, calculated as the disparity between sales revenue and explicit production costs alongside opportunity costs, experienced substantial growth, surging by 83.53% in 2019 compared to 27.13% in 2018. The economic profit margin reached 27.30% in 2019, maintaining a consistent upward trajectory through 2022. The margin indicates that the company’s strategic investments in acquiring firms over the preceding five years have proven to be highly advantageous.
Source: Company’s Financial Statement
The return on invested capital (ROIC) rose from 19.2% in 2018 to 24.4% in 2019 and further increased to 25.0% in 2022. Maintaining a consistently high ROIC in relation to the cost of capital, Visa demonstrates efficient utilisation of investors’ funds to generate income. Additionally, the economic spread ratio witnessed a notable upswing from 12.31% in 2019 to 12.90% in 2022. This highlights Visa’s financial success in capital investments, particularly in the strategic acquisition of other businesses.
With the anticipated completion of the Pismo acquisition in the upcoming months of 2023, Visa aims to further enhance its revenue trajectory. The company’s history of benefiting from strategic acquisitions, which have consistently improved its services to customers, suggests that the Pismo acquisition will likely contribute to this positive trend, as reflected in the increase in its share price after the announcement
In recent years, SoFi, once primarily recognised for student loan refinancing, has strategically navigated the financial landscape through a series of acquisitions, transforming itself into a comprehensive financial services provider. SoFi Technologies, Inc., the prominent digital personal finance company, successfully concluded its acquisition of Technisys on March 3rd, 2022, marking a significant milestone in its strategic expansion. The transaction, valued at approximately $1.1 billion and executed entirely in stock, represents 13% of SoFi’s prevailing market capitalisation. This acquisition stands in parallel with SoFi’s earlier notable purchase of Galileo for $1.2 billion, a move that has resonated positively with investors and fortified the company’s position as a key player in the financial technology landscape.
SoFi’s tactical acquisitions, marked by the expansion of product offerings and the embrace of transformative technologies through Galileo and Technisys, have propelled the company into a dynamic force within the financial services landscape. This evolution is not only evident in its innovative approach to banking and payments but also reflected in its financial performance.
Source: Company’s Financial Statement
Analysis of SoFi’s cumulative total stockholder return graph from June 1, 2021, to December 31, 2022, reveals a nuanced performance of its common stock Despite the successful navigation through industry shifts, SoFi encountered challenges, trailing behind the cumulative total returns of both the Nasdaq Composite index and the S&P Financial index. This performance highlights the significance of ongoing strategic adaptation in a dynamic market. The performance analysis indicates that a $100 investment in SoFi’s common stock as of December 31, 2022, yielded $20.35, exhibiting a decrease compared to the $92.66 return from a $100 investment in the S&P on June 1, 2021.
A distinction is Technisys’ ability to support multiple banking products within a unified core system, a departure from the fragmented approach prevalent in many traditional banks. Its cloud compatibility enables real-time data processing and analysis, a critical capability for institutions seeking to stay ahead in the digital era. By emphasizing application programming interfaces (APIs), Technisys ensures seamless integration of diverse software components, enabling banks to expedite the rollout of digital banking products.
Examining the financial implications, SoFi’s investment of $1.1 billion in stock, while dilutive to existing shareholders, is underpinned by the anticipation of substantial returns. Management projects the acquisition to yield between $500 million and $800 million in additional revenue by the close of 2025.
Source: Company’s Financial Statement
A significant portion of this incremental revenue is expected to stem from marketing Technisys services to traditional banks. This strategic move aligns with SoFi’s broader objective of bolstering its tech segment, as evidenced by Galileo’s $178 million in revenue for the 12 months ending September 31, 2021. With the integration of Technisys, SoFi is poised to significantly amplify the contribution of its tech segment to overall profitability, consolidating its position as a trailblazer in the financial technology domain.
Buzz Summary
Growth in any business arena comes with inherent risks, especially in the ever-evolving landscape of the fintech industry. When you invest in growing companies, you’re essentially banking on both future growth prospects and current profitability. This requires you to determine the sustainability, duration, and rate of this growth. This begs the vital question: do fintechs predominantly grow through mergers and acquisitions (M&A) or organically?
While both avenues can be fruitful, acquisitions entail higher risks, such as taking on excessive debt, overvaluation, or challenges in integrating acquired entities. To mitigate these risks, agile financial modeling, effective cash flow management, and the identification of key performance indicators should take precedence. Adopting a dynamic financial approach enables swift scenario analysis and adjustments, offering the flexibility needed to navigate uncertainties in real time. This strategy aids in averting potential overpayment risks and optimising the integration process for long-term success.
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