The M&A merry go round

Last week’s announcement that FIS has decided to spin off its merchant acquiring business (essentially Worldpay) created shock waves in the industry. After all, the 2019 acquisition of Worldpay Inc (itself formed when Vantiv acquired Worldpay in 2018) was the largest ever M&A transaction in the payments space at some $43 billion, and appeared to create a superpower in the sector, which along with Fiserv (following its own acquisition of First Data) would dominate payments processing for years to come. Yet only 15 quarters on from that point “activist investors” seem to have pressurised the board into changing a strategy that seemed core to the vision for the company. Market volatility has, without doubt, been a force in driving the change. FIS acquired Worldpay at the top of the market, and the subsequent market dynamics and geopolitical and economic challenges that have followed in the last few years have dragged on FIS’s share price. This said, it’s hard to make the case that this explains the decision to reverse this mega-acquisition so dramatically.

Debate will reign eternal about balancing the position of investors, many of whom operate to a simple 90 day cycle focussed on EBIT, OFCF and other balance sheet measures, with that of building a multi-year plan for a corporation. In a world where lead times on enterprise sales are often 18-36 months, this polarises even further. Ironically, this dichotomy itself influences the decision to enter into M&A activities. The demand from the markets to increase revenues can often only be met by acquiring new revenue streams, and with it the underlying complexities anyone who has partaken in a process would identify as typical.

If we accept that balancing the needs of almost all stakeholders is nigh on impossible over an extended period, should it be concluded that M&A will increasingly be seen as less critical to business growth? The answer to that is clearly no. Companies will want to buy, companies will want to sell and there is a whole industry devoted to ensuring this remains core to the thinking of the commercial world at large. The question therefore is not whether M&A will continue, but how can we as an industry maximise the chances of success for everyone involved. I have no idea how much the process of acquiring Worldpay Inc, attempting to integrate it, rationalising its operation and then setting it free again will have cost FIS by the close of the recently announced process, but given FIS has taken a $17.6bn provision on the balance sheet for Worldpay, I think it’s fair to say it’s been value destroying. To be fair to everyone involved, as mentioned earlier, this is not atypical. I worked for a business that actively acquired over an extended period and saw an accretive effect from only a handful of the dozens of companies it brought into the fold.

In the case of FIS and Worldpay, there were some key revenue synergies proposed that would be driven as a result of the balance of capability, footprint, market presence, and a combination of world class pure play issuer and acquirer creating a holistic end to end solution compelling the market to take a one stop shop approach. The scale of the acquisition was huge, and the commercial ambitions needed to deliver at the same scale for the project to be a success. The challenge was enormous, but sadly for all stakeholders the outcome did not align with the vision.

The reality is that integrating companies into others is almost never a smooth process. The cost efficiencies are seldom realised, and the layers of additional bureaucracy created often increase costs rather than reducing them. In many cases this is followed closely by client dissatisfaction with all the attended cost of addressing that, and the probability that many of the core people responsible for driving the success of the business acquired will move on or be released. Light switch changeover is almost impossible to achieve, and it is incredible to think that a business of scale is not somehow distracted by the challenge of integrating another, adding to the pressure and at times damaging the smooth operation of a successful business.

In the payments sector we have seen a broadly consistent set of arguments across the industry to support the idea of businesses acquiring competitors. Sometimes the argument is as uncomplicated as take a damaging competitor out of the market. At least this is simple to measure and has limited impact; on numerous occasions I have heard the argument for consolidating “their clients onto our technology” yet I have almost never seen this succeed. Instead, companies end up supporting multiple products and service offerings doing the same job with incompatible technologies and no ability to cross utilise skills or resources. Cost and complexity are layered when the stated objective was absolutely the contrary. Most of us have seen examples of this, but the process persists.

Another approach driving acquisition in the payments sector that is that of companies trying to buy their way up the value chain. We will move from hardware to software, services to replicable product, on-premise to cloud and multiple others. Rarely though do companies reflect on the fact that their current organisation is entirely aligned with its existing position in the value chain, and without major reorganisation (and in some cases the commercial equivalent of open heart surgery) there is little chance of any economy of scale being achieved or an existing sales team having the wherewithal to successfully promote the new solution effectively. TAM is a great measure of potential, but if we don’t then ask the question “is our current team capable of engaging with the TAM identified?” we ignore the single biggest influence on commercial success. Sales success in one area, does not automatically extend to another if the team isn’t able to effectively articulate the proposition and understand client needs.

These are simply examples of the many factors that drive acquisition in and around payments technology. As mentioned previously the need to show major revenue growth is another that forces situations on management teams. When we add in the fact that there are often multiple suitors for the business being acquired, the pressure to drive the process can be immense and often there is not time for anything other than action; sometimes without the time to complete proper impact analysis. I know many will argue that due diligence is intended to address this, but that is often a one-dimensional process that is charged only with ensuring the acquirer gets no nasty surprises post-acquisition rather than addressing how the merger itself will play out.

As ever is the case, there is no silver bullet to this problem. Every part of the acquisition process can be improved in most situations. The fundamental question remains: how do we maximise the chances of success? With impeccable timing, the team at TFPA has been working on a paper on acquisition drawn from our own experiences of acquiring and being acquired. We believe this experience, derived from companies of all sizes, provides real world know-how which will help our clients and partners navigate M&A with greater ease and less pain. For those interested, the paper will be issued by the end of March and you can request a copy through the following link: contact@tfpnet.com