Earlier this week it was announced that Vista Equity Partners had struck an agreement to purchase Canadian lending, payments, and financial solutions software supplier D+H for C$4.8bn including debt.
The acquisition would have made headlines in its own right, after all billion dollar deals aren’t exactly ten a penny. In a market which has been predicted to accelerate its M&A activity in 2017, the D+H acquisition is by a distance the most significant development we have seen this year to date.
But the development is perhaps much more significant than the value of the deal. That’s because Vista Equity partners already owns one of the biggest banking software development companies in the UK, Misys, and has made clear that it intends to fully integrate the two companies.
The merger will create a single company that will instantly be recognised as a global giant in the fintech industry, employing 10,000 people and generating in excess of $2.2bn of revenue. The clients of the combined companies currently span 130 countries and include 48 of the world’s 50 biggest banks.
“We are thrilled by the prospect of combining these two leaders in the Fintech industry,” Brian N. Sheth, Co-Founder and President of Vista Equity Partners, told the press on announcing the news.
“D+H is an outstanding company with impressive talent and deep experience providing technology solutions to financial institutions worldwide. Over the last five years we have worked closely with the Misys management team to transform and grow its global business and this is a great next step in that process. Together, Misys and D+H have the promise to shape and lead the future of financial software.”
It is that last comment that that is the most interesting, and prompts the question “Does this now mean that we going to see a trend of similar deals?”
For months, the chatter surrounding M&A in the fintech industry has been that the industry is on the precipice of consolidation waves, so it is worth considering whether the floodgates have now been opened by this deal.
As businesses mature and the market continues to get increasingly competitive, established fintech firms will turn to acquisition to meet growth targets and maintain market share as they fight off the wave of new entrants looking to innovate over the ideas of the previous generation.
We have already seen this on a smaller scale, it is now relatively commonplace for fintech giants to add new strings to their bow of product offerings via the absorption of a start-up that is more nimble and at the forefront of innovation than they can now hope to be.
Consolidation between mature fintechs serves a different purpose, instead of innovation it is economy of scale and market share that are the principle drivers. The now combined client list of D+H and Misys is a huge competitive advantage that will secure the future of the merged business by blocking out emerging companies from gaining comparable market share.
VCs too are increasingly looking at investing in mature firms, rather than pouring money into start-ups. Whilst the value of capital that Is being invested into the industry continues to increase, reports suggest that the volume of investments is falling, a sign that investors would rather put their money into established companies, prompting more consolidation of larger firms.
And yet another reason for fintech firms to bulk up their market presence is that financial services and traditional firms are also in the market for fintech companies themselves, in order to benefit from their digital expertise as the market continues to shift in that direction.
As the pool of target clients to partner with dries up due to financial services acquiring their own fintech providers, competition is going to be stiffer. Consolidation the industry is therefore virtually inevitable, getting ahead of the trend will leave firms in a stronger position once the dominos start falling.
“The combination of our two companies creates significant opportunity for our customers, our employees and our partners,” said Nadeem Syed, CEO Misys, explaining why the move to merge the companies was made now. “By coming together, we have the opportunity to create a global fintech powerhouse, positioning us to lead the corporate banking software space, accelerate our cloud-based offerings, and expand our footprint in North America.”
The takeover is expected to be concluded during Q3 2017, with the Misys and D+H merger expected to begin immediately. Whether more super-mergers are announced between now and then is yet to be seen, but it now seems a more realistic possibility that the landscape of the fintech industry could be drastically different. If that comes to pass, then we may be looking back at the Misys/D+H merger as the spark that lit the powder keg.