Final approval may be months away, but Capital One’s $35 billion acquisition of Discover likely has other payments players rethinking their M&A strategies.
That’s according to Erin McCune, a partner and member of the financial services practice at Boston-based consulting firm Bain & Co. McCune is the co-author of a report published last month on payments M&A, which highlighted an expectation of “heightened deal-making” this year. That’s partly because some struggling payments and fintech startups will need an exit plan.
With deal-making poised to ramp up, the industry needs to give more thought to the execution and integration of acquisitions, McCune said. Digesting a sizable acquisition and realizing the synergies envisioned at the outset can be “hard work,” said McCune, who spoke with Payments Dive on Feb. 22. “But when it’s successful, it’s incredibly powerful.”
Editor’s note: This interview has been edited for clarity and brevity.
PAYMENTS DIVE: Do you expect the Capital One-Discover deal to lead to more payments M&A this year?
ERIN MCCUNE: What I find interesting is that it’s actually counter to some of the trends that we were observing. The biggest deals have actually been divestitures. Obviously, FIS-WorldPay. Just last month, Amex sold off fraud business Accertify. And we know that Barclays in the U.K. is looking to offload its acquiring business.
This type of deal is what I would call a very inside-baseball payments deal. It's got a lot of permutations, in terms of issuing and acquiring, in terms of digital banking, in terms of realigning the market segmentation, in terms of what types of cardholders and what types of consumers Capital One and Discover traditionally went after. So there's a lot of things about this that are interesting, and it has permutations and implications across every single part of the payments value chain, whether you are a network, an issuer, a bank, a merchant or an acquirer. This is one of those milestone deals that’s going to trigger a bunch of rethinking across the industry.
What might that rethinking look like?
Large payment companies that may have been sitting on the sidelines, a little bit uncertain about M&A deals, may now have a little further motivation. Everyone’s going to watch how long that deal takes to get approved. These big deals do, inevitably, garner a lot of attention. If it does succeed, it may open the floodgates and we may see a resurgence of activity, where there’s been some hesitation.
Something like this makes various participants in the industry start to react, even if the deal takes a while to close. I think it will get people off the fence or provide some motivation. We’re getting a little bit closer in terms of valuations, there’s a little bit more confidence about what’s going on with interest rates, and we’ve got a lot of assets out here. Private equity’s sitting on things that they would like to sell so they can move on to the next deal. This will trigger both an interest in divesting assets, as well as a desire to acquire capabilities and acquire scope and reach.
We’re going to continue to see modest-sized, small deals. Payments is an incredibly fragmented space, we have so many young companies that despite very disciplined cost management, are going to reach the end of their runway. And so there are going to be some good, interesting assets that come available.
As far as divestitures, there are a lot of really bloated conglomerates and companies out here. Some got very excited during the fintech boom, and some of those deals may not have really met their expectations and so there probably are going to be parts and pieces that may be spun out.
What are companies considering as they weigh potential acquisitions?
We’re spending a fair amount of time talking to companies throughout the diligence process, anticipating what it’s going to take in order to realize value. I just think we need to get back to basics there.
As an industry, we need to pay a lot more attention to the post-deal integration, and the execution. There are so many things that have tremendous promise, and I think that it’s hard to realize the value. There are lots of reasons: inadequate technical due diligence, or not enough attention on the cultural fit. Or just an inability to really understand — if you’re an incumbent and you bought a shiny new capability, a lack of focus on really understanding what you’ve purchased and how to deploy it.
