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Financial institutions M&A: Sector trends - June 2018
Insight

Financial institutions M&A trends: Market infrastructure

Market infrastructure — a mixed bag for dealmakers

The whirlwind of payments M&A gathers force. The perfect storm of growing customer demand, regulation-encouraged competition and mega-returns has got buyers and sellers transacting at record pace.

 

M&A in payment services is red hot, but anti-trust concerns in the trading platform space and dominant incumbents in the custodian sub-sector has meant deal activity as a whole has been uneven.

 

Payments

Deal activity intensifies. Financial sponsor activity, growing buyer appetite and market consolidation drive M&A.

Our M&A forecast

Financial sponsor investments and exits are likely to support high levels of deal activity. Larger market participants also turn to M&A as they move to build scale in response to increasing competition and customer demand.

Current market

Upward, very high activity levels

We are seeing

  • Financial sponsor-led and established bank M&A
  • Market consolidation of service providers and systems operators
  • Polarised reaction to ICOs and cryptocurrency dealing

Key drivers

  • Consumer demand for personalised, value-added services
  • Regulatory initiatives:
    • Increased competition through system operator unification
    • Open-banking facilitated through PSD2
  • Rationalisation of payment infrastructure:
    • Expansion of service offerings
    • Access to new customer bases
    • Margin squeeze from intense competition (e.g., alternative payment channels and fintechs)
    • Operational capability and cost optimisation

Trends to watch

  • Continued financial sponsor interest
  • Consolidation — fewer global and integrated service providers
  • Increasing investment in fintech – search for:
    • Data protection and cybersecurity risk management tools (e.g., AI and advanced authentication technology)
    • More efficient and cost-effective transfer technology (e.g., instant payment processing)
    • Next-generation customer-experience enhancement tools (e.g., wearables)
  • Regulator intervention (e.g., UK Payment Systems Regulator's new code of practice is expected in September 2018)
  • Diminishing role of traditional payment intermediaries

 

Stock exchanges & clearing houses

Efficiency the motivator, as operators seek scale. Prolonged low trading volatility sees trading platforms turn to M&A in response to shareholder pressure for improved profitability.

Our M&A forecast

Shareholder pressure to increase profits may force operators to seek out economies of scale and scope, making inorganic expansion a priority. However, antitrust concerns may mean that M&A activity is centred on regional consolidation and vertical integration.

Current market

Upward

We are seeing

  • Regional market consolidation, with some signs of platforms favouring 'home' markets
  • Inorganic vertical integration
  • Increasing acceptance and utilisation of fintech
  • Increasing competition in the UK clearing space

Key drivers

  • Shareholder pressure to increase profits, given prolonged low trading volatility:
    • Achievement of economies of scale through acquisitions
    • Diversification into alternative trading tools (e.g., data provision for fixed-income and ETF products)
    • Increase of service offerings (e.g., clearing and cryptocurrency services)
  • MiFID II resulting in stock exchanges providing increased research coverage for their smaller companies

Trends to watch

  • Antitrust regulators restricting mega-mergers
  • Increasing dependence on fintech (particularly AI and blockchain)
  • Possible impact of Brexit on London's €-clearing business:
    • Diversification to clearing in foreign currencies
    • Aggressive competition between European exchanges to promote their 'home' markets
    • Fragmentation of European markets
    • Increasing clearing costs leading to promotion of New York as an alternative venue

 

Custodians

Outsourcing and digital offer options, but incumbents remain cautious.

Our M&A forecast

As cryptocurrency markets mature, custodians may look to expand into digital asset services. Deals like BitGo's purchase of US-based digital custodian Kingdom Trust may spark similar transactions in Europe.

Global players enjoy dominant positions and are under no immediate pressure to chase deals.

Current market

Flat

We are seeing

  • Uptick in outsourcing arrangements, including utilisation of digital efficiency options
  • Custodians with strong balance sheets expanding inorganically

Key drivers

  • Identification of new revenue streams given low net-interest income
  • Higher operating cost bases and heightened regulatory enforcement risk

Trends to watch

  • Expansion of global players into digital asset custody services, through acquisitions and organic growth

 

Payments: Publicly reported deals & situations

Payments M&A is expected to increase materially in 2018.*

Private equity bonanza

Deal highlight

Spectacular exits continue. Hellman & Friedman completed its acquisition of Nets for more than US$5 billion, to merge the Danish player with Advent's and Bain's Concardis only a few months later. The deal forges a behemoth to compete with the likes of Worldpay, Inc.

  • Acquisitions:
    • SoftBank: Acquisition of 14.2% of Paytm (May 2018)
    • Francisco: Acquisition of Verifone (April 2018)
    • Equistone: Acquisition of Small World (March 2018)
    • Nordic Capital: Acquisition of Trustly (March 2018)
    • Hellman & Friedman: Acquisition of Nets (February 2018)
  • Disposals:
    • Index Ventures, General Atlantic and Iconiq: Adyen's IPO on Euronext Amsterdam, involving existing investors disposing of 13.4% of outstanding shares (June 2018)
    • Bridgepoint: Disposal of Trustly (March 2018)
    • FPE Capital and MMC Ventures: Disposal of Small World

Polarised reaction to cryptos

ICOs reach new heights, including Block.one's US$4bn ICO (May 2018).

Cryptocurrencies hit an aggregate value of US$800bn in January and slumped to US$260bn by April.**

  • Support:
    • Governments:
      • Sweden: Proposal for creation of e-Krona (April 2018)
      • Russia: Proposal for creation of "cryptorouble" (January 2018)
    • Regulators:
      • French AMF: Dedicated legal framework for ICOs, which is currently under construction and is expected to be effective from January 2019 (May 2018)
      • Gibraltar GFSC: Support for ICOs on the under-construction Gibraltar Blockchain Exchange (March 2018)
      • Swiss FINMA: Regulation of ICOs under AML laws or as securities (February 2018)
    • FIs/Fintech:
      • Revolut: Introduction of ripple and bitcoin cash to its trading offering (May 2018)
      • J.P. Morgan: Launch of crypto strategy (May 2018)
      • Goldman Sachs: Launch of its crypto trading desk (May 2018)
      • Barclays: Crypto trading JV with Coinbase (March 2018)
  • Scepticism:
    • Governments:
      • UK Treasury Committee: Launch of investigation into digital currencies and DLT (February 2018)
    • Regulators:
      • ECB: Proposal to ring-fence crypto trading (May 2018)
      • UK FCA: Confirmation that cryptocurrency-linked financial offerings are in the regulatory perimeter (April 2018)
    • FI/Fintechs/Tech majors:
      • Virgin Money and Lloyds: Bans on credit card customers purchasing bitcoin (February 2018)
      • Stripe: Withdrawal of support for bitcoin payments (January 2018)
      • Google, Microsoft (Bing), Facebook, Twitter and LinkedIn: Bans on cryptocurrency advertising (January – March 2018)

Market consolidation

Deal highlight

Ingenico has continued to be an active trade consolidator in 2018. The fast-growing global payments player also acquired Bambora from Nordic Capital in 2017.***

  • Acquisitions:
    • Worldline: Acquisition of SIX Payment Services (May 2018)
    • PayPal: Acquisition of iZettle (May 2018)
    • Paysafe: Acquisition of iPayments (April 2018)
    • Edenred: Acquisition of Candex Solutions (April 2018)
    • Easy2pay: Acquisition of MyOrder (April 2018)
    • Linxo: Acquisition of Sharepay (April 2018)
    • Nexi: Acquisition of Banca Carige's merchant acquiring business (March 2018)
    • Mastercard: Acquisition of Oltio (March 2018)
    • Visa: Acquisition of Fraedom (February 2018)
    • FairFX: Acquisition of City Forex (February 2018)
    • Lighthouse Network: Acquisition of Shift4 (January 2018)
    • Ingenico: Acquisition of Paymark (January 2018)
  • JVs:
    • BNPP, Société Générale and certain other French banks: Launch of new services by mobile payment JV Paylib (May 2018)
    • Mastercard: Push payments JV with Dream Payments (February 2018)
    • Visa: Mobile payment and loyalty app JV with Allianz (February 2018)
  • Mergers:
    • Nets & Concardis: Merger (June 2018)
    • B+S Card Service & Payone: Merger (May 2018)
    • Faster Payment & Bacs: Unification into the New Payment System Operator (May 2018)
    • Vipps & BankID & BankAxept: Merger (April 2018)

Institutional interest

  • Acquisitions/equity investments:
    • DNB Bank: Minority equity investment into Payr (May 2018)
    • Natixis: Acquisitions of Comitéo, Dalenys and a majority stake in Alter (February – April 2018)
    • Allianz X: US$35m investment into GO-JEK (April 2018)
    • Crédit Agricole and Citi: Acquisitions of minority stakes in SETL (February 2018)
    • ING: Acquisition of 75% of Payvision (January 2018)
  • JVs:
    • NatWest: Cardless fast-track payments JV with Carphone Warehouse (June 2018)
    • Groupe BPCE: Money-transfer JV with TransferWise (June 2018)
    • Santander: Payments JV with Ripple using Blockchain xCurrent and RippleNet technologies (March 2018)
    • HSBC: Corporate payments JV with PayPal (March 2018)
    • Western Union: Money transfers JV with Ripple (February 2018)

E-commerce interest

  • Rakuten: Strategic investment in Azimo (May 2018)

 

Stock exchanges & clearing houses: Publicly reported deals & situations

Market consolidation

  • New York Stock Exchange: Acquisition of Chicago Stock Exchange (April 2018)
  • Euronext: Acquisition of the Irish Stock Exchange (March 2018)

Preference for home market?

  • London Stock Exchange: London-Shanghai Stock Connect with Shanghai Stock Exchange (May 2018)
  • Deutsche Börse: Aborted plans to expand its Eurex derivatives unit in Singapore (January 2018)

Vertical integration

  • Deutsche Börse: Acquisition of GTX ECN (May 2018)
  • Clearstream: Acquisition of Swisscanto Funds Centre (April 2018)
  • Euronext: Acquisition of 80% of InsiderLog (January 2018)

Digital world demands

  • Börse Stuttgart: Debt instrument digital marketplace JV with LBBW (June 2018)
  • CME: Acquisition of NEX (May 2018)
  • Deutsche Börse: Blockchain securities lending solution JV with HQLAX (March 2018)

"Challenger" competition

Deal highlight

ClearBank is the first UK "challenger" clearing bank in nearly 200 years and the brainchild of Worldpay founder, Nick Ogden.***

  • Aquis Exchange: IPO on AIM (June 2018)
  • TransferWise and ClearBank: Access to the UK Bank of England interbank payment systems (January – April 2018)

 

Custodians: Publicly reported deals & situations

Rise in outsourcing

  • Janus Henderson: Outsourcing of its US middle and back office operations to BNP Paribas Securities Services (April 2018)
  • Robeco: Outsourcing of its custody and securities lending business to J.P. Morgan (January 2018)

Digitalisation

  • Northern Trust: Cash optimisation JV with Hazeltree (April 2018)
  • HSBC Securities Services: Cloud-based investment management platform JV with FINBOURNE (April 2018)
  • Northern Trust: Private equity audit blockchain JV with PwC (March 2018)

Growth

  • BNP Paribas Securities Services: Acquisition of Banco BPM's depositary banking business (February 2018)
  • Northern Trust: Acquisition of Citadel's hedge fund technology resources (January 2018)

 

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* Source: Goldman Sachs Equity Research (January 2018).
** Source: Reuters (April 2018).
*** White & Case LLP acted on this transaction.

 

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