Are mergers and fintech increasingly an oxymoron? Hopefully not, but looking at how the two big deals fell apart, it seems.
In August 2021, global payments giant PayU announced a $4.7 billion deal to acquire domestic payment gateway company, BillDesk. The PayU-BillDesk deal will be the largest M&A deal in the fintech space and the second largest in the Indian startup ecosystem, following Walmart’s $16 billion acquisition of Flipkart. But more than a year later, Prosus NV (the parent company of PayU Payments based in the Netherlands) terminated the agreement, citing the precedent that “some conditions” were not met. The decision came as a surprise as it was dropped after the Competition Commission of India (CCI) blessed the transaction.
Even before the fintech sector could face its biggest deal loss, the sector has seen the fall of another highly anticipated major merger. About a month ago, fintech giant PhonePe canceled its acquisition of ZestMoney, one of the pioneers and leading startups in the postpaid buying or BNPL space. This is after six months of rigorous due diligence. Ironically, it was later reported that the Walmart-backed PhonePe had dropped the deal because ZestMoney’s business “did not meet the required standards”.
in a soup
The collapse of two M&A deals in quick succession has put the investors, innovators and startup founders of the world’s third-largest fintech ecosystem in a dilemma.
Ninad Karpe, Partner at venture capital firm 100X.VC, says complex transactions in any regulated industry are never easy to complete. “The fintech industry, and rightfully so, is very regulated. So it is not easy to complete large fintech transactions, unlike in edtech or other sectors.”
Tightening regulations on digital lending and wallet payments in recent years and delays in regulatory approval are probably some of the reasons why transactions have been canceled. In the case of PhonePe-ZestMoney, the reason can be much more complicated.
The BNPL industry, where ZestMoney operates, has faced regulatory hurdles in recent times. Last year, the Reserve Bank of India prevented fintechs from loading credit through Prepaid Payment Instruments (PPIs), such as wallets and prepaid cards, which affected players in the BNPL industry.
Although the PhonePe-ZestMoney deal failed due to “due diligence” concerns, experts say the deal will nonetheless face regulatory hurdles in the next phase, as it can be seen as a back door entrance for PhonePe and for other fintechs in the future world, to get the NBFC license. The banking regulator remains selective about fintech operating as a non-bank.
Prabhtej Singh Bhatia, co-founder of modern fintech infrastructure company Falcon, joins with a slightly different approach. He believes that since M&A deals mostly happen in the same industry, regulatory issues and complex approval processes must be fully considered at the time of decision-making. “Not only fintech M&A, but overall deals in the startup sector have dropped due to winter funding. It may have little to do with the fundamentals or the soundness of these companies,” he added.
Neha Singh, co-founder of data platform startup, Tracxn, concurs. “The fintech space in India has always been one of the most active in the country and has seen significant acquisition activity in recent years. The ongoing funding winter has created a major cash crunch for a number of startups in the field.” The data corroborate Singh’s position. The number of M&A deals in the fintech space is 30 in 2021 and grows to 40 in 2022. In the current year, this has dropped to 14 deals so far.
In addition to regulatory hurdles, experts believe that the exorbitant valuations of some late-stage fintechs, relative to the realities of their business, could also dent interest – possibly a Another important “deal breaker”.
For example, the market failures of some recently listed new-age fintech companies such as Paytm and PB Fintech also reduced investor confidence, forcing them to rethink their agreed valuations. agreement at the time of entering into the agreement.
Falcon’s Bhatia says it’s easier for early-stage companies to raise capital, but in the growth phase, valuations start to rise. A lot of companies are just beginning their journey of maturity to the end of claim rate protection.
He added: “Investors generally prefer to place early-stage bets with great growth potential rather than deal with companies that are facing slowing growth and having difficulty cutting back. expense.
Singh feels the ongoing funding winter and increased uncertainty in the global economic outlook will likely spur more consolidation in the fintech space in the future.
“We will see more and more new companies emerging with innovation and product ideas in the fintech space over the next 2-3 years. Usually, consolidation is the trigger point for M&A, so that will happen as there are more fintechs,” Karpe said.
Now that access to the market through an initial public offering seems more difficult than before, the sector is unlikely to have any more failed marriages. Especially if the exit should be somewhere at the end of the tunnel for investors.