So You Want to Buy a Fin­tech Firm

Es­tab­lished fi­nan­cial in­sti­tu­tions in­vest­ing in fin­tech star­tups walk a fine line be­tween nur­tur­ing growth and man­ag­ing risk.

The Malta Business Weekly - - FRONT PAGE -

oung fin­tech com­pa­nies hold con­sid­er­able ap­peal for in­vestors look­ing to get in­volved in high-growth areas, and es­tab­lished fi­nan­cial in­sti­tu­tions are no ex­cep­tion. By ac­quir­ing one of these dis­rup­tive new play­ers, legacy fi­nan­cial com­pa­nies can gain in­no­va­tive ca­pa­bil­i­ties they might not be able to ac­cess oth­er­wise.

Fin­tech firms typ­i­cally of­fer na­tive dig­i­tal prod­ucts, a nim­ble op­er­at­ing model, a cus­tomer-ori­ented mind­set, and a tech-savvy work­force—all likely mo­ti­vat­ing fac­tors be­hind last year’s $13.7 bil­lion in ac­qui­si­tion vol­ume¹ in­volv­ing these firms. But along with those at­trac­tive as­sets of­ten comes sig­nif­i­cant risk. Dis­tin­guish­ing the tar­get’s ac­tual prod­ucts and ca­pa­bil­i­ties from va­por­ware can be im­por­tant, for ex­am­ple, and it may be a chal­lenge to pre­vent tal­ent flight and main­tain growth amid op­er­a­tional fric­tion.

In­te­grat­ing a fin­tech com­pany presents an en­tirely new set of po­ten­tial chal­lenges for even the most M&A-savvy fi­nan­cial in­sti­tu­tion. CIOs at com­pa­nies con­sid­er­ing such a move can help by en­cour­ag­ing their or­gan­i­sa­tions to fol­low a few crit­i­cal steps.

YChoose the right model

Es­tab­lished com­pa­nies in­te­grat­ing a new fin­tech ac­qui­si­tion typ­i­cally take one of two ap­proaches. The first is a ca­pa­bil­ity-driven strat­egy, in which the ac­quir­ing firm seeks to in­te­grate new prod­ucts, chan­nels, or ca­pa­bil­i­ties into its ex­ist­ing busi­ness port­fo­lio to fill a gap or pre­pare for a po­ten­tial market shift. The sec­ond ad­heres more closely to a hold­ing com­pany model, in which the ac­quir­ing in­sti­tu­tion builds a port­fo­lio of fin­tech com­pa­nies that op­er­ate in­de­pen­dently while lever­ag­ing the par­ent or­gan­i­sa­tion’s scope and scale.

Ei­ther of these can be a vi­able path. Which one the ac­quirer chooses can af­fect its ap­proach to due dili­gence and, ul­ti­mately, inte- gra­tion. De­spite their rel­a­tively small size, fin­tech star­tups may be built on busi­ness mod­els and tech­nol­ogy plat­forms that are un­fa­mil­iar to legacy fi­nan­cial in­sti­tu­tions. As a re­sult, care­ful due dili­gence is es­pe­cially im­por­tant.

Un­der­stand the prod­ucts

It’s es­sen­tial that the ac­quir­ing firm gain an in-depth knowl­edge of the tar­get’s com­plete prod­uct life­cy­cle and where in that life­cy­cle its prod­ucts lie. This can al­low ac­quir­ers to value the prod­ucts ap­pro­pri­ately and un­der­stand the com­mer­cial busi­ness prac­tices they are seek­ing to in­te­grate. It can also help them more ac­cu­rately fore­cast re­sources needed to sup­port ac­quired prod­ucts af­ter in­te­gra­tion so they aren’t over­looked in the larger or­gan­i­sa­tion.

Be­gin this in­tel­li­gence gath­er­ing with a clear view of the spe­cific cus­tomer be­hav­ior or market niche the tar­get firm is ad­dress­ing. Ex­tend due dili­gence deep into the tar­get’s prod­uct road map or pipe­line to gain vis­i­bil­ity into the fu­ture func­tions, prod­uct en­hance­ments, and blue-sky projects in flight or planned, and the ad­di­tional re­sources re­quired to ex­e­cute them.

En­gage and re­tain tal­ent

Tal­ent is of­ten a pri­mary value driver in fin­tech ac­qui­si­tions, but many fin­tech em­ploy­ees join their young firms out of a de­sire to re­shape the in­dus­try. In an ac­qui­si­tion, they may sud­denly find them­selves part of the very firms they were try­ing to dis­rupt.

There may also be rad­i­cal dif­fer­ences in of­fice cul­ture and work en­vi­ron­ment, com­pen­sa­tion, and at­ti­tudes to­ward rules, risk, and reg­u­la­tion. For a firm at­tempt­ing to build ca­pa­bil­i­ties through ac­qui­si­tion, find­ing a way to main­tain this cul­ture af­ter in­te­gra­tion is cru­cial to help­ing pre­vent the tal­ent flight that can of­ten fol­low. Pay spe­cial at­ten­tion to the ti­tles given to newly in­te­grated em­ploy­ees to en­sure they ac­cu­rately com­mu­ni­cate their new roles and se­nior­ity. Even the phys­i­cal space in which new staff are lo­cated can be crit­i­cal.

Cul­tural align­ment and in­te­gra­tion are par­tic­u­larly high pri­or­i­ties for firms in­te­grat­ing a startup com­pletely into the par­ent com­pany, but they’re still im­por­tant for hold­ing com­pa­nies, es­pe­cially if any newly ac­quired fin­tech firms will be co-lo­cated with the par­ent or­gan­i­sa­tion.

Ease op­er­at­ing model fric­tion

Cul­ture shock can pose new chal­lenges op­er­a­tionally. Fin­techs and their em­ploy­ees may be ac­cus­tomed to more tech­no­log­i­cal free­dom than is cus­tom­ary in tra­di­tional fi­nan­cial in­sti­tu­tions, in­clud­ing the flex­i­bil­ity to bring their own de­vices, use public cloud stor­age, work re­motely, or use open source code. In­te­grat­ing these new em­ploy­ees into a more con­trolled en­vi­ron­ment can sub­stan­tially re­duce pro­duc­tiv­ity. Ac­quir­ers may con­sider carv­ing out a new tech­nol­ogy pol­icy specif­i­cally for fin­tech firms that ac­counts for these dif­fer­ences by al­low­ing for con­tin­ued tech­no­log­i­cal flex­i­bil­ity while ad­her­ing to reg­u­la­tory and prac­ti­cal re­quire­ments.

Prop­erly struc­tur­ing gover­nance mod­els is like­wise im­por­tant for re­tain­ing a fin­tech’s nim­ble­ness. Many young firms use Ag­ile or lean method­olo­gies; while widely used and un­der­stood in the tech­nol­ogy sec­tor, these ap­proaches may not mesh well with a tra­di­tional fi­nan­cial or­gan­i­sa­tion’s ex­ist­ing IT or le­gal and com­pli­ance func­tions. Achiev­ing value in the trans­ac­tion may de­pend on un­der­stand­ing how the two firms’ mod­els dif­fer and es­tab­lish­ing a model for gover­nance and in­ter­ac­tion that en­ables the fin­tech to con­tinue in­no­vat­ing.

‘Ring-fence’ rev­enue

In any trans­ac­tion un­der­taken to drive growth, it is im­por­tant not to lose sight of the ma­jor rev­enue driv­ers and as­sess whether they are at risk. This is es­pe­cially true in the case of a tra­di­tional fi­nan­cial in­sti­tu­tion ac­quir­ing a startup. Earlystage com­pa­nies are of­ten sin­gle-minded in their drive for growth; in­te­gra­tion into a larger or­gan­i­sa­tion may dull that edge as time and re­sources are pulled away from market-fac­ing ac­tiv­i­ties and into ac­tiv­i­ties such as build­ing com­pli­ance specs.

Shield­ing rev­enue-driv­ing teams from non­crit­i­cal ac­tiv­i­ties can help them main­tain their fo­cus on rev­enue growth even as they in­te­grate into the larger or­gan­i­sa­tion. This is par­tic­u­larly im­por­tant when the ac­quir­ing firm chooses to fol­low the hold­ing com­pany strat­egy, as each com­pany ac­quired will likely have to prove its on­go­ing value. ***

The very fac­tors that dif­fer­en­ti­ate ac­qui­si­tions of fin­techs from those of more tra­di­tional firms are of­ten the keys to the suc­cess of these young com­pa­nies thus far. Pre­serv­ing that value de­pends on cre­at­ing an en­vi­ron­ment in which newly ac­quired fin­techs can con­tinue to grow and thrive. For more in­for­ma­tion, please visit www.deloitte.com.mt

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