The Green Sheet Online Edition
April 23, 2018 • Issue 18:04:02
Growth by acquiring: opportunities and challenges
Mergers and acquisitions have long been a staple of the payments industry, where companies quickly adapt or perish. Industry analysts expect the trend to continue, as digital innovations change the way people shop and buy. Consumers are demanding fast transactions and deliveries; merchants need smart, agile systems and advanced technologies to address these requirements.
"Fintechs are simplifying financial services," stated Liz Elder, Senior Research Consultant at Gartner L2 Inc., a global digital research firm. "Legacy brands that rely on their market share are surprised and even flabbergasted that people are flocking to these upstarts. But fintechs are nimble and digitally savvy and legacy players are struggling to catch up. Big brands throw money at the problem, while something else falls by the wayside. They may excel in social media but not ecommerce."
"Merchant acquirers need to help merchants apply technology effectively to reduce errors, obtain better information and remove activities that don't add value," stated Thomas McCrohan, Managing Director at Mizuho Americas research. "Customer value in acquiring has shifted to adding digital capabilities, from streamlined account onboarding to real-time data analytics that merchants can use to manage their businesses."
Raymond Pucci, Associate Director of Research Services at Mercator Advisory Group, said acquirers have three options for improving technical proficiencies: they can build capabilities in-house, partner with specialists or acquire technology firms. By choosing the third option, companies can improve time-to-market while achieving economies of scale, he noted.
More mergers predicted
Two years ago, Pucci predicted U.S. acquirers would continue to seek growth opportunities by entering new markets and specializing in vertical applications. In Mercator's June 2016 report, Merchant Acquiring's Ecosystem: Evolving Beyond Transactions, he noted escalating M&A activity and heavy technology investments, including the Global-Heartland and TSYS-TransFirst mergers. Pucci's predictions proved accurate. First Data Corp.'s CardConnect and BluePay acquisitions, followed by Vantiv-Worldpay and TSYS-Cayan, made headlines in 2017.
Pucci recently told The Green Sheet he sees mergers becoming more technology-centered and verticalized. "Legacy acquirers may merge with gateways and cross-border specialists to bolster ecommerce volume," he said. "Payment security, another major category, is a crowded field with a lot of talent. Mastercard buying New Data Security and LexisNexis acquiring ThreatMetrix are recent examples. Security firms make attractive acquisitions, even for acquirers with their own resources and competencies."
Andy Payment, Principal at Symbiom, a business-to-business marketing consultancy, expects M&A activities to create new opportunities for his fintech clients. "The entire industry is reshaping itself around value-added software and solutions," he stated. "Running a software company is drastically different from running a payments company. You'll continue to see a reshaping of the market as long as there are software and service assets available, even if at ridiculous valuations."
Attorney James Huber, Partner at Global Legal Law Firm and payments specialist, said mergers can improve efficiencies and free merchant level salespeople (MLSs) to focus on what they do best, which is selling. Huber sees a strong future for MLSs and ISOs, despite ever-changing industry regulations.
"In the near future, we expect to see further consolidation of the ISOs and agents under the larger ISOs," he said. Long term, he forecasts greater consolidation due to increasing regulation, such as card scheme rules or self-regulations that require sub-agents and ISOs to be registered direct and abide by card brand policies. That level of control could make a sub-ISO, agent, or even ISO an employee of the ISO or processor, which he believes would lead to greater consolidation.
Six degrees of unification
As he reflected on the "merger mania" of 2017, former Street SmartsSM columnist Jeff Fortney, Vice President of ISO Channel Management at Clearent LLC, wrote, "It seemed we couldn't go more than two months without hearing about another sale or merger. These announcements usually follow a similar pattern: reference the synergy of the two companies, talk about how the acquirer saw opportunity to expand into a specific niche and then, finally, share a projected close date (which usually falls two to four months into the future)."
Fortney's article "Don't let acquisitions catch you off guard" appeared Jan. 8, 2018, in issue 18:01:01 of The Green Sheet, two months before Clearent was acquired by a private equity firm. While no two mergers are completely alike, Fortney identified several predictable phases. Following is a closer look at each stage and its inherent opportunities and challenges.
- Building the relationship: The initial discovery phase involves getting acquainted with a prospect's personality, culture and potential contribution to your organization. Consider how a potential partner could further your end goals, and don't rush the process, Huber suggested. The Global Legal Law Firm's recent merger with the Ghilezan Law Firm is a case in point. "Our firms began working together over three years ago simply cross-referring business that was within each respective firm's expertise," he said. "Discussions regarding a partnership occurred almost immediately after seeing how the two firms complemented each other."
- Vetting the candidate: Having confirmed a candidate's potential value, additional due diligence is required to fully vet the prospect. Online reviews and insights from sales channel partners and merchant customers can help create a dimensional profile of a prospect's reputation and industry ranking. Huber said, "The best way to vet a potential partner is to ask others in the industry regarding their experience and dealings." McCrohan recommends discretely gathering intelligence from customers and, if possible, the prospect's investor base.
- Aligning interests, setting goals: Once the candidate has been fully vetted, companies can focus on the business fit between the organizations and set key objectives for the merger. How do your customers make money and which of your solutions give them cost efficiencies? If you understand your customers and your customers' customers, you understand how to make money, save money and control operations, Pucci explained. "This requires an up-front plan and road map, and then to work backwards to see how the partner will further that goal," Huber stated.
- Structuring the deal: When entering into a definitive agreement, Huber recommends having an attorney well-versed in payments thoroughly review proposed terms and conditions. "Many agreements have obligations that simply are not possible," he stated. "And in many circumstances, it does not matter what the agreement states because the party that controls the cash flow has superior bargaining power."
McCrohan said making the numbers work is imperative. "Avoid making any revenue synergy assumptions in the deal model," he added. "Cost synergies should take into consideration natural headcount attrition that frequently occurs when there is a change in control, but don't wait too long to provide employees of the target company assurances they are still needed."
- Completing the transition: Completing a corporate merger requires detailed planning surrounding conversion of data, effective communication to acquired personnel, and putting the right management team in place to manage it, McCrohan stated.
Pucci said this critical phase involves fit, price and execution. "Have a good business fit with compatible geographies, cultures and synergies," he stated. "Have the right valuation and effective execution by providing a clear management structure without too many layers." He recommended having a clear line of command; dual roles such as co-CEOs can create delays and distractions. Clarify who's doing what as you continue to run a business. As salespeople pick up extra territories, they still have to maintain existing relationships, he said.
- Maintaining consistent messaging, brand promise: Most experts agree when a merger is completed, the real work can begin. Companies must act decisively to ensure the new entity reflects the former company's brand promises and heritage. "It starts with having a clearly defined strategy based on real value delivered to a clearly defined set of customers," Payment said. "Then, being transparent with stakeholders about the sacrifices required to deliver against this vision once the deals are done. Transforming billion-dollar global companies through acquisitions is never smooth."
Team effort required
Jared Isaacman, CEO of Shift4 Payments LLC, presided over six acquisitions over the last nine months, acknowledging it would not have been possible without the total dedication of everyone on his team. There was a multitude of rebranding that had to be done, but he and his employees felt they had to seize the opportunity to dominate the food and beverage and hospitality markets. And the organizations they acquired shared that belief and sense of urgency, he said.
"You will meet immense headwinds if you and your partner have a different approach to getting things done," he stated. "We shared a universal belief that we and our new partners were coming together and our collective output would be greater than what we'd be able to do independently."
On the positive side, not a lot had changed since the company's 2008 debut as Harbortouch, he noted. The company used POS technology as both a platform and differentiator. "We had a product that couldn't be easily duplicated," he said. "The Harbortouch mantra was to go out and win and retain customers. This emboldened us to enhance and fortify our position in Food and Beverage. Today we have great coverage in all hospitality verticals."
Looking ahead, Isaacman anticipates more merger and acquisition activity. With Ingenico Group providing gateway services and Verifone's potential acquisition by Francisco Partners, it's clear companies can no longer compete by selling boxes, he said, adding that Visa owns CyberSource – is that the line or will they move further down the field, past payments' most fundamental boundaries? "We're in for a rollercoaster ride over the next few years and with so much noise in the market, we don't always know what's going on," he said. "We all got the news last night that Paysafe is acquiring iPayment; we haven't seen the end of it yet. As mergers continue, it wouldn't shock me to see the field narrow from five or six super players to three or four in a few years."
It's always exciting when two organizations with similar philosophies, values and interests come together, noted Mike Peters, President, Partner Solutions at TSYS Merchant Solutions. Peters was Senior Vice President of Commercial Services at TransFirst when TSYS acquired the company. "And now we're the quiet giant, going about our business, acquiring new partners, merging them into our organization and moving on," he said. "Our philosophy has always been, 'how can we help you grow your business?' We support our partners by bringing strong product sets and people resources together."
Peters described TSYS' acquisition of Cayan LLC in December 2017 as a perfect value exchange. "We needed their product suite and they needed our scale," he said. The Cayan merger came together quickly, without fanfare, he noted. Through the diligence process, we recognized Cayan's strengths and understood where we needed to expand and contract. "The week the deal closed, we met with the TSYS and Cayan leadership teams," he recalled. "We got down to business, without egos or saber rattling, and agreed to meet the folks who will actually get this stuff done."
Executives can formulate a plan and say let's make this happen. But you need to spend time with the people who will drive the message down into the organization, Peters said. The process is similar to assembling a giant puzzle: you begin by completing the perimeter and lining up the pieces.
"Don't assume each area of functionality has been buttoned up in the diligence process," he added. "Pressure test the knowledge base. Balance meetings of the mind with cross-functional pieces on the operational side."
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