Will US firms hoover up European fintech?
A weak pound may be the catalyst for a much-touted fintech M&A boom.
What with 2022’s turmoil in public equity markets, slow down in venture capital volumes and all-around bearishness to anything tech-related many have expected a boom in start-up M&A.
With IPOs the usual ‘exit’ most founders work towards pretty much closed for now, companies that have a solid business but are still some way off from sustainable revenues will increasingly merge or acquire each other. That’s the theory at least.
So far it hasn’t really happened in fintech.
Fintech M&A activity was noticeably quieter during Q2 2022 with the lowest number of deals (318) since the same period in 2020 (298) and the lowest volumes ($37.3bn), also since Q2 of 2020 when it was $8.3bn, according to FT Partners.
Could the trend be about to change?
Might these two deals herald a broader trend of US firms expanding into the European fintech market via acquisitions?
Banks, particularly JP Morgan and to a lesser extent Goldman Sachs, have been fintech's biggest drivers of M&A in the past few years. But as the two deals mentioned illustrate, other larger fintechs can also be a source.
There are huge mounds of ‘dry powder’ waiting in the wings also, after investors pulled money from risk assets owing to inflation worries this year. Eventually, that cash will need to find a home.
A weak pound compared to the dollar certainly will help. The dollar has been on a tear this year as the Fed has increasingly upped its aggressiveness towards monetary policy in its bid to combat high inflation.
The strength of the dollar means that UK-denominated equity is arguably ‘cheaper’ now than it was at the start of the year.
So far in 2022, the dollar is about 20 per cent stronger against the pound. The euro has followed a similar pattern and is trading at a 20-year low against the dollar.
In the years after the Brexit referendum in 2016, when the pound began its slide on currency markets, a similar pattern emerged with US firms hoovering up UK assets.
There is also good reason to expect further weakening in sterling.
Of course, M&A isn’t simply driven by currency prices. Mark Barnett, Mastercard’s Europe President told me in a recent interview that the US payments giant didn’t strictly have an M&A strategy governed by external factors but instead took decisions on acquisitions based on longer-term reasoning.
“If there's a part of our strategy where we need to develop something...a capability, then we do the normal build, partner or buy process. Sometimes the answer is to buy. And sometimes the answer is to partner where we make a minority investment or just a commercial arrangement. Sometimes we'll build the capability ourselves,” he said.
“We were not adjusting [that] based on down rounds and all that sort of stuff. We're not adjusting our strategy, but we're always in the market for the good commercial deals, or minority investments or even sometimes acquisitions,” he added.
Whether M&A comes to European fintech in the form of rival US-based startups, incumbent banks or other financial corporates, there is every reason to expect more of it. A prolonged currency 'discount' can only help.