By Mark Travis
Payment processors focused on integration with software technology solutions are drawing hefty double-digit multiples in the merger and acquisition market from acquirers attracted to the stickiness and profitability of the customer relationship.
These technology-driven payment processing companies will drive the future of payments. Two M&A deals and one IPO over the past two years have drawn significant valuations and provided validation of the industry’s desire to acquire and invest in technology-savvy companies in the payment processing industry:
- TSYS acquired TransFirst from private equity firm Vista Equity Partners, an all-cash transaction valued at approximately $2.35 billion. The deal closed in April 2016 at a valuation of 13.8X 2016 projected adjusted EBITDA.
- In June 2014, Vantiv Inc. acquired Mercury Payment Systems from PE firm Silver Lake Management for $1.65 billion in cash, representing a transaction valued at approximately 17.7X 2013 adjusted EBITDA.
- The Square IPO (“SQ” NYSE) launched in November 2016 currently commands a market cap of approximately $4.2B and has yet to turn a profit.
These three companies are/were particularly attractive for two primary reasons. First, their integrated strategy of embedding their payment services into their customer’s software platforms has resulted in high customer retention rates and profitability. Second, as the financial risks of a system breach continue to escalate, these technology savvy companies are generally more prepared to defend their systems and merchant customers from attack.
The movement away from a basic payment processing terminal to software integration of payments is not new, but it has significantly picked up steam over the past five years. Private equity players and other strategic buyers have seen and, in the case of the three companies above, realized the value of the long-term relationships that newer payments technologies can form with clients. Expect this trend to continue and expand.
Payments via the cloud
Cloud-based solutions are part of this movement. The larger players in the payments space have developed proprietary integrated cash register solutions that allow businesses to build apps on top of their payment system. These apps would include those processes necessary to run the business like:
- Time and attendance
- Benefits management
Even the smallest of companies are leveraging tablets and smart phones to process payments through technology partnership with the larger players.
Payments processing is a major economic force
The Perryman Group noted that “Convenience encourages consumption both domestically and globally, and about 80% of all consumer spending is now non-cash based,” according to a report in which The Perryman Group evaluated the size and impact of electronic payments on behalf of MasterCard.
“The beneficial effects have been substantial, and we estimate that the U.S. economy is more than 12% larger (as measured by real gross product) than it would be in the absence of the electronic payment system,” The Perryman Group reports.
Online transactions from mobile and online payments, smart wallets and contactless payment systems could reach $3.6 trillion this year, according to a recent study by Jupiter Research.
Payments technology will continue to evolve, and it will be imperative for industry players to stay atop the technology curve, either through their own expertise or via technology savvy partners to compete going forward.
Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including technology.