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2024 Will Be a Bounce Back Year for Payments M&A


Commentary by Jim Zipursky, Chairman & CEO of Corporate Finance Associates Worldwide, a Strategic M&A Partner of TSG

Challenging is the best way to describe the 2023 M&A market. Uncertainty would be another descriptor. The number of mid-market transactions and deal values are down this year. In the payments industry through Q3 we’ve seen 46 deals, coming off a peak of 132 deals in 2021 and 114 in 2022. While unfortunate, a slowdown was inevitable, especially considering the “black swan” impact of the COVID pandemic.

However, while the market is down, “down” is relative compared to prior periods. The overall M&A market is better today than in 2008 to 2011 but not as strong as 2015 to 2019. There are still transactions happening, and Baby Boomer owners are heading to retirement in record numbers now and over the next five to 10 years.

The following is commentary, trends, and insights regarding today’s M&A market, including specific notes on payments, technology, and software. The consensus?

  • Never have the fundamentals of growth, retention, and profitability been more important.
  • We can expect 2024 to be a better year than 2023 for M&A activity.
Overall Market
  • The “bubble” created by the pandemic continues to impact the M&A market.
    • There were companies who performed well during the pandemic; however, buyers want to know if the growth seen by those companies from 2020 to 2022 is sustainable or was a one-time spike. Similarly, buyers want to know if the recovery is sustainable or short-term for companies that were impacted by the pandemic but recovered in 2023. Uncertainty leads buyers and sellers to longer processes or delayed market entries.
  • According to S&P Global, global deal volume was down 27% from Q2 2022 to Q2 2023.
  • Rising interest rates always negatively impact valuations.
    • As the cost of capital increases, buyers tend to lower purchase prices, thus impacting transaction values. According to the most recent GF Data report, Senior/Junior leverage in transactions in Q2 2023 were down almost 1 turn of EBITDA from the same period in 2022 (3.1x EBITDA in Q2 2023 vs 3.7x EBITDA in Q2 2022). Such a dramatic drop in leverage leads to less transactions and lower valuations.
  • Deal valuations are down.
    • GF Data’s most recent report shows that overall deal valuations are down 5% from 2022 to 2023. However, deals in the $10MM to $25MM value range are down 12% and deals in the $50MM to $100MM value range are down 9%.
  • We are also seeing a significant slowdown in fundraising for both VC and PE funds.
    • This follows record years of fundraising efforts, meaning a decline was all but inevitable.
  • Investment bankers and private equity groups believe 2024 will be an up-year in M&A.
  • Earnings matter. Buyers scrutinize earnings and seek profitable companies.
    • Revenue alone is no longer the sole metric for buyers…they want profitable revenue.
  • Clean financial statements matter.
    • If a business owner considers selling their business and if ‘owner-related adjustments’ account for more than 10% to 15% of their EBITDA, buyers will heavily discount these adjustments, unless the adjustments have support from a sell-side Quality of Earnings report
  • Overall, there is a small decline in M&A activity in the payments industry. However, the decline is smaller than what we are seeing in the broader tech/software sector.
  • Valuations in the payments industry are also down, but again, not to the same degree as the tech/software space.
  • The hallmarks of the payments industry, recurring and/or reoccurring revenue, continue to be highly sought-after aspects of acquisition targets.
    • Recurring revenue is seen as a safety net for both buyers and lenders.
    • Buyers continue to turn to payments for M&A because of the recurring revenues inherent in the industry.
  • Year-to-date, compared to 2022, the portion of deals involving an acquisition of an ISV and those categorized as non-ISOs in payments are slightly up, while acquisitions of an ISO are slightly down. Payments companies are expanding less using the traditional path of adding merchant portfolios. Now they focus more on acquisitions that improve their technology, reach, or infrastructure.  (Related: Executive Interview Series: Sam Wares, TSG Director of Client Success & M&A Expert)
  • As with the overall market, we see 2024 as a much more robust year for M&A activity, with a high level of pent-up transaction potential.
Software & Technology
  • The pandemic-induced shift to virtual offices and remote work led to increased desirability of software and tech companies, resulting in higher valuations and heightened M&A activity. According to White & Case: The pandemic sent valuations of technology assets to heady heights, as investors sought to capitalize on a rapid global online shift in everything from remote working to streaming entertainment. Valuations have since reversed that trend, in some cases heading below their pre-pandemic levels, which has contributed to the recent divergence between deal volume and values compared with the pre-pandemic period. The NASDAQ-100 Technology Sector Index, for example, was down almost 40% year-on-year by the end of 2022, versus approximately 17% for the S&P 500, as inflation and monetary tightening took center stage and investors rotated away from tech and into energy, healthcare and other defensive plays.
  • According to Kroll, deal volume tech deals are down significantly from their COVID peak, dropping by 27% or more. Additionally, most of the tech deals completed in 2023 are smaller. The mega-deals are not as frequent.
  • According to Zinnov: M&A activity in the tech sector experienced sluggishness due to a confluence of factors. Including inflation, geopolitical conflicts, a stringent regulatory environment, and apprehensions within the Banking sector. The challenges were further compounded by high interest rates and an investment conundrum.
  • SaaS continues to be of great interest to the M&A community but is not immune to current market pressures. EBITDA multiples for privately held SaaS companies (based on completed transactions) are down 22% from 2H2021 to 1H2023…declining from 17.8x to 13.8x.
  • We have also seen a dramatic decline in software company valuations based on multiples of revenues. Buyers are focused on earnings more than revenues. We saw multiple of revenues decline by more than 70% from 1H2021 to 1H2023.

Related: What is My M&A Payments Multiple? | M&A: Overcoming Challenges and Embracing Opportunities

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M&A News on the Go 

While economic factors have influenced M&A movement, the outlook has some positive attributes, and interest in payments and fintech continues to draw more attention. 

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