M&A Activity in the Merchant-Acquiring Industry Heats Up

As 2017 heads toward a close, merger-and-acquisition activity in the merchant-acquiring space is on track to equal or exceed 2016’s number of deals, and buyers are paying more as the pool of quality acquisition targets shrinks.

Annapolis, Md.-based First Annapolis Consulting Inc. tells Digital Transactions magazine for its upcoming December issue that as of early November there had been 37 deals this year involving acquirers, with an average deal size of $366 million. That’s just two shy of the 39 deals in all of 2016, which averaged $291 million.

Buyers are paying a lot more, too. In 2016, the average multiple paid was 11.8 times earnings before interest, taxes, depreciation, and amortization (EBITDA), according to First Annapolis, a unit of the global consulting firm Accenture plc. In 2017, the multiple is up to 15.3.

One reason prices are rising is that there are fewer high-quality processors around, especially mid-sized ones, that could be acquisition candidates. C. Marc Abbey, managing director of payment acceptance at First Annapolis, says mid-sized acquirers, those the firm defines as processing between $10 billion and $100 billion in annual payment volume, controlled 23% of the U.S. market in 2012. But soon, “that mid-tier is going to control less than 10%,” says Abbey. “There’s kind of a disappearing middle.”

Henry Helgeson, cofounder and chief executive of Boston-based merchant processor Cayan LLC, says buyers are having a harder time finding independent sales organizations that have relationships with software vendors (ISVs) that in turn have extensive relationships with merchants, in addition to a presence in under-exploited niches.

“The problem is there’s very few left that have any value,” says Helgeson, whose firm bought Card Payment Services LLC (CPS), an ISO specializing in serving small waste haulers, in May for an undisclosed price. “There is some scarcity value right now.”

Also powering 2017’s M&A market is the increased presence of so-called financial buyers such as private-equity firms that have the money to finance deals. This year’s buyers include 28 strategic buyers, such as other processors, and nine financial buyers. The 2016 deals involved 35 strategic buyers and only four financial buyers, according to First Annapolis.

Industry insiders predict M&A activity will remain strong next year as companies continue pairing up to get more scale, fill holes in their product offerings, or establish a presence in new geographic markets.

“In 2018, the consolidation within the payments industry will not slow down,” says Marc Gardner, president and chief executive of Troy, Mich.-based North American Bancard, by email. “There will continue to be significant plays made to acquire the necessary pieces to assemble a comprehensive suite of payment-processing services for merchants.” NAB in June bought a big ISO, Total Merchant Services, for an undisclosed price.

The full story will be available in Digital Transactions Dec. 1.