I've been studying the financial technology sector over the past few weeks. I have found that it is a niche sector, making it hard find a lot of sector data and statistics on. But I have been analyzing the breadth of companies within this sector. It includes anything related to financial services being offered faster, smarter and more efficiently. These services can be from a new technology related to allocating trades quicker, to trading algorithms developed by the financial equivalent of rocket scientists.
What's different in this market, compared to others is that there are no major worldwide players. For example, in computers, IBM, Apple, Dell, HP, and Sony control over 80% of the market share. In mobile phones, Apple, BlackBerry, Nokia, Samsung, and Motorola control over 80% of the market share. But in the financial technology industry, it could be any company. Thomson Reuters purchased Vhayu to integrate their algorithmic trading analysis software into Thomson Reuters' Quantitative and Event Driven Trading solutions. Bloomberg acquired Brainpower, which allowed it to offer more analytical software to the many hedge funds already using Bloomberg's software. These are large companies providing a large breadth of data services. Although, the major players are companies such as Fiserv and Sungard, there are still many other companies in different industries like Bloomberg and Reuters whom want to offer services in the growing financial technology sector. Looking at the different types of buyers of fintech sector, you can see the variety. Exchanges and indices, such as Euronext, and Dow Jones Market; business solution provider, IBM; research and analytic providers, Factset, Morningstar, Bloomberg, and Reuters; and financial IT providers such as Fiserv, and Sungard. These are just a small number of the well known brands, and there are many more buyers, showing the potentially large growth of the sector.
But getting into M&A for these types of firms, can serve to be difficult. Looking at both sides of the puzzle can offer an array of directions the firms can take. A number of questions need to be addressed.
Does the seller's business sell a unique service? Does that unique service have a strong business model? This will help determine if the buyer would be buying the company to give a value added service to the customer, or as a means for profit, or both.
Would a suitable buyer be able to the take the company to the next level? Would it purchase the business for the knowledge and brainpower the employees have? Or will it purchase it for the patents? Would it fire the current employees and outsource? or would it require employees to move to the corporate headquarters? Would the CEO and executive leadership be joining the buyer, or be free to leave the organization? Or would there be a timeline of when the executives could leave the firm. And will there be stock options and other corporate benefits offered? From these questions, covenants for employees would need to be addressed in the M&A agreement.
Will the buyer be incorporating the firm into its own services? or will it be purchasing it as a subsidiary? Will the buyer be paying in cash, shares or both? Will there be stock options or warrants involved?
These are all standard questions, but the main question will be, can the company culture and values continue strongly in a larger, more bureaucratic organization. These will be two significantly different cultures, combining into one. Small companies in a growing industry have a very different culture. They're small, mobile, quick to adapt to change. Their employees carry extra responsibilities. But if the buying company doesn't have a culture to support that system. If they instil their own culture into the employees, and employees have a negative response, they can lose the brainpower behind the purchase.
The financial technology M&A market declined significantly during the recession, but as the overall M&A increases as it is now, financial technology M&A will rise at a very strong rate. Looking at the sector, there are many small players, and as the major players increase the services and technology they want to offer, the quantity of acquisitions will rise. Industries have the tendency to grow significantly, and then consolidate to a small number of major players, and I anticipate this to continue in the growing financial technology industry.