In a Business That ‘Requires Scale,’ Avangate Swallows 2Checkout And Eyes More Deals

For a company looking to grow via acquisitions, the increasing complexity of the payments business can be an advantage. That’s what Atlanta-based Avangate Inc. is banking on. On Friday, the online processor for digital goods clinched a deal to acquire 18-year-old e-commerce gateway 2Checkout.com Inc., and its appetite is hardly satisfied.

“We don’t think this [deal] is the ultimate answer. We’re doing this as a start,” Alex Hart, Avangate’s chief executive, tells Digital Transactions News.

Future acquisition candidates are likely to be startups that have what may be a great idea but are having trouble growing organically as the business extends into technologies ranging from mobile to messenger apps, and from artificial intelligence to the Internet of Things. “A lot of people are finding that the payments business is a lot more complicated than they thought,” Hart says, so “there are a lot of subscale businesses. We’re keeping our eye out.”

But for the immediate future, Avangate will have a full agenda absorbing Columbus, Ohio-based 2Checkout  The deal, which closed Friday and was announced Monday, calls for the combined company to drop the 11-year-old Avangate name in favor of the more widely recognized 2Checkout brand. Hart will serve as chief executive, while the current CEO of 2Checkout, Ken Benvenuto, will take a seat on the company’s board and serve as an advisor. The two men are well-known to each other. Benvenuto was Hart’s boss during a spell in the late ‘90s at e-payments pioneer CheckFree, now part of Fiserv Inc. The parties are not announcing a price.

Hart is counting on the combination to spark growth and achieve economies of scale, not only for the former Avangate but also for the old 2Checkout. “We were both subscale businesses in a business that requires scale,” he says. “We weren’t investing as aggressively as we thought we needed to.”

Indeed, the deal’s rationale, in part, lies in how it expands the former Avangate’s reach. Founded in 2006 as a marketer of antivirus software, the company, most of whose employees work in Romania, ultimately built a business processing online payments for software firms and other sellers of digital goods. Clients include Bitdefender, HP Software, and Kaspersky Lab. But its business is mostly concentrated in North America and Europe.

With 2Checkout, the company will broaden its reach beyond digital goods to more than 200 other merchant category codes. It will also pick up clients outside of North America and Europe, as only 20% of 2Checkout’s revenue comes from those regions. In these ways, the deal represents “a considerable increase in our addressable markets,” says Hart. All told, the new company starts out with 8,000 active merchants processing in 87 currencies in more than 200 countries.

But the combination brings another advantage. Avangate had been operating with what Hart calls a “merchant-of-record” model, meaning it was a full-function processor handling chores ranging from sales and value-added tax to currency conversion to product downloads. By harnessing the capabilities of 2Checkout, Hart says, the combined company will be able to offer prospects a range of capabilities from gateway to full-function provider. “And there are variations in the middle,” he says. “We think we need to give merchants a continuum.”

With that strategy, and with the prospect of more deals to come, Hart hopes to wrench the new 2Checkout out of the “subscale” growth trap. Observers say the odds may already favor the new entity. “Each of the two companies had valuable components, but together the two companies can deliver a more comprehensive solution,” notes Rick Oglesby, president of AZ Payments Group LLC, a Mesa, Ariz.-based payments consultancy.