The Vacation From Reality Is Over

Real-world living can be a hard, grinding affair, but sometimes some folks are granted what we might call a “holiday” from reality—a chance to escape from the cares of everyday living, brought on, perhaps, by a big raise, a winning lottery ticket, or a substantial inheritance from dearly departed Aunt Martha. Still, reality can and does re-assert itself eventually, even in these lucky cases.

Such is the case right now with the state of affairs in payments M&A. Just as our fortunes are ruled by real-world developments, dealmaking in payments has begun to yield to the requirements of business—including, dare we say, the requirement to make money.

That imperative has put the clamps lately on acquisition activity. Total deals in 2023 came to 72, representing a 37% tumble from the 114 recorded in 2022. And that number, in turn, was down 14% from 132 in 2021. All these numbers are courtesy of TSG, the Omaha-based payments researcher and consultancy, which tracks deal announcements in payments.

Nor, apparently, is the pace showing signs of quickening. There were 18 proposed combinations announced in the first quarter, nearly flat with the 19 seen in the first period of last year, according to TSG, which looks at announcements regarding independent sales organizations, independent software vendors, gateways, and “other” players, a category that includes proposed combos like the $35.3-billion offer in February by Capital One to buy Discover Financial (for more on that, see “What’s in Capital One’s Wallet?” our cover story last month).

So how is 2024 likely to shape up in the world of deal activity among payments companies? The experts aren’t looking for a faster pace any time soon. “When considering primary trends within payments M&A, my guess is that the number will be much closer to last year than the heights of 2021,” said Sam Wares, director of client success at TSG, in an analysis posted by the firm last month.

What accounts for the slowdown in payments M&A? Wares’s analysis leads him to the thesis that, when all is said and done, payments deals have now come to be driven by profit-seeking on the part of would-be buyers, not growth potential and certainly not the “cash burning” that at one time dazzled payments and other industries.

Nor is this a short-term trend, warns Wares. “Buyers remain focused on profitability in acquisition targets as opposed to growth potential,” he writes. “I view this as the main factor that has suppressed deal count and will continue to do so.”

So, in other words, profitability rules. Startups, too, will need to show “a clear path to profitability,” Wares says. Who’d have thought?

—John Stewart, Editor john@digitaltransactions.net