Good Time to Buy? Payments M&A Outlook Through 2023

The bumpy macroeconomic conditions in the past few months have caused valuations to compress across every industry. With uncertain times ahead, it is important to understand how macroeconomic trends affect the payments space. Although intuitively one might start to save money during these times to protect their downside, in the payments space quite the opposite is occurring.

With increased competition between larger payment processors and startup technology companies like Stripe, there has been increased pressure for acquisitions by the larger players. With payment processing volume being “stolen,” by growing technology startups with advanced intellectual property, larger processors are stuck between a rock and a hard place. Some are navigating this time by hiring in-house software developers to develop “intelligent payments processing,” while others have turned to investment banks to advise them on possible M&A targets within the payments space. 

733Park has previously covered transactions JP Morgan’s acquisition of Renovite, which is an example of the M&A activity in the payments space. With interest rates rising, there has been a significant slowdown in the level of economic activity. Fewer consumer transactions mean less merchant revenue for global payment processors. However, since the payments industry exhibits mostly inelastic demand for the software, exceptionally low churn rates are seen. One can expect to see 2-3% churn rates overall for business-to-business SaaS companies within the payments space. As such, payment revenue, although slowing down, will not cause a complete collapse in sales. This decrease in revenue combined with rising interest rates leads to overall multiple contraction and thus increased buy-side activity. 

With cheaper companies, overall larger payment processors are looking to capitalize and double down on technology. Larger companies that have had the chance to grow their cash position over time, have the advantage to buy some of these smaller companies that might be struggling with sales growth stalling and financing costs rising. Larger companies will allow management teams and employees to continue working on products that increase payment processing efficiency. Moreover, with venture capital drying up, finding a partner for growth is become harder, and thus, being integrated with traditional processing companies might also offer a chance for these smaller companies to live on. 

Another possible outcome of the macroeconomic environment is the increased deployment of private equity and other such capital partners. Private equity is the process of buying out companies using debt and providing companies with advice while in the portfolio of the larger fund. This industry has seen an increased amount of capital in recent years as this alternative asset class has benefitted from multiple increases over the past decade. The investment thesis for many of these firms revolves around buying high cash flow generating business without much cyclicality. Moreover, for earlier stages of investing within the space, there has been an increased amount of capital deployed with companies that are close to generating some form of cash flow. Although rates have risen, and private equity is reliant on interest rates, firms are driven by multiple expansions over time by adding value. This tends to drive more returns over the 5–7-year hold period. As a result, with the multiple contraction in the past few months, private equity investors might look at the payments industry as they fit into many of the portfolios of these funds. Payments tend to be anti-cyclical with stable cash flow generation. Especially with technology implementation within the space, margins are significantly higher than in traditional payments companies. With strategies such as M&A roll-ups or tuck-ins, these funds hope to create larger technology conglomerates which they would ideally sell to larger players or take public after the holding period. 

The past few months have been interesting for a few reasons. Inflation, rising interest rates, and multiple contraction have caused markets to react negatively. Although times are uncertain and there have been significant buying opportunities for larger payment processors.