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Digitization has immensely evolved through the years. It has greatly influenced our ways of living and revolutionized how we interact with one another. In our daily lives, digital technologies enabled us to seamlessly communicate and connect even from across the globe.
In the financial landscape, business was considerably changed as we know it. Digital transformation and innovations made business partnerships and transactions easier and have aided the rise of mergers and acquisitions.
Mergers and Acquisitions, often referred to as M&As, is a term generally used to describe the consolidation of businesses or assets through different kinds of financial transactions. These include mergers, acquisitions, consolidations, tender offers, procurement of assets, and management acquisitions.
The recent trend of M&As could be traced to multiple factors, however, technological advancement is undeniably one of the leading reasons. Given the huge global advancement of digital innovations in a short span of time, the cost of system transformation from legacy tools to digitally driven mechanisms have consequently led to more business collaborations and partnerships, with massive businesses cooperating with smaller companies to improve and modernize their technologies.
This business gameplan is often considered as a more efficient and affordable scheme given the less cost compared to building and transitioning to new technologies.
Thanks to the massive growth of fintech itself and the increase in capital funding within the industry, small and medium-sized entities are now able to purchase creative firms that are upending the industry with their disruptive ideas.
According to Marc Kitten, partner at a business management consulting firm called Candesic and the current director of the Imperial College Business School’s Mergers & Acquisitions Executive Education program, the current trend of mergers and acquisitions is just a logical phenomenon in the development of the fintech industry.
These changes in the traditional financial structures were likened by Kitten to what has previously happened with biontech and with the internet. The combination of various digital technologies such as machine learning (ML), artificial intelligence (AI), cloud and SaaS migration, sophisticated sensors, and many others have been disrupting conventional financial systems. This is given the fact that investing in innovative people and products rather than trying to build them internally is way more efficient, easier, faster, safer, and cheaper for financial institutions.
Kitten also pointed out that in a highly competitive and rapidly changing industry, digitalization is typically a chance for business owners and investors to cash out. Aside from this, it also helps other industry players by providing access to the consumer base and established competitors’ systems, especially in light of rising regulatory and compliance expenses.
Another factor for why businesses would rather combine than spend money on new technologies is market volatility. Financial institutions become more resilient as a result of the growth they get, especially during times of uncertainty.
According to Vivi Friedgut, CEO of Blackbullion, a digital financial wellbeing platform, the industry should expect that it’s going to be difficult to raise money for the foreseeable future, at least for the next 12 months, given the current push and pull fluctuations in the market. Because of this, Friedgut pointed out that this is a favourable time for businesses to merge and acquire one another.
Friedgut also noted that although fintechs have been preparing for a strategic exit, current circumstances also make it a great time to sell. He indicated that after a few years that Blackbullion have spent establishing its business, they are seeing that now is the perfect time to pick up speed. He sampled that in actuality, Blackbullion could possibly have constructed the product they decided to acquire, but tactically, buying it is more effective given they needed it to move quickly.
Being acquired by a larger firm can help smaller brands debut their products in a larger market and soften the shock of a volatile market, but there are some cons as well. For one, M&As may result in a lack of independence for business founders, as pointed out by Michael Buckworth, founder of Buckworths, a UK-based law company that specializes in assisting fintechs and other digital enterprises on a variety of legal and commercial concerns. As a result, these founders may find that the controls placed on them suddenly go much beyond those set by their previous VC investors and affect their budget, strategy, and staffing decisions.
Buckworth pointed out that selling and being procured by others entails giving up ownership and being owned by the buyer and, in the case of the original owner, basically turning into an employee of the acquirer. This can be a difficult transition for business owners accustomed to having a lot of operating freedom.
According to him, freshly acquired businesses may also experience focus issues because larger organizations frequently make many acquisitions, which dilutes their attention to each team.
He also pointed out that founders may discover that they must fight to keep the interest of the buyer’s management once the initial focus on implementing the purchased business has passed. This may cause disillusionment and difficulties with corporate expansion.
However, the benefits of M&A are alluring, particularly because they free entrepreneurs from the daily stress of managing the entire organization. For instance, there are more opportunities to concentrate on the company. According to Buckworth, many business owners completely consume their time and attention by constantly raising money.
He mentioned that most often, business owners are divided into multiple departments, such as HR and legal compliance, which frequently come to an end with acquisition. Ideally, teams and processes have been put in place to deal with regulatory, legal, and HR issues. Founders are then free to concentrate on the company’s core operations and specialities.
Marc Kitten also agreed, further expounding that it is highly relative to how well the buyer integrates their smaller acquisition, adding up that many acquirers unintentionally lose value by failing to establish a common corporate culture, which makes the entrepreneurs too dissatisfied to stay. He indicated that the buyer’s strategic priorities frequently shift. Sometimes the procurement served solely to eliminate a technology that was being cannibalized. He added up that some financial institutions, such as Goldman Sachs have taken lessons from the past and now operate their own mechanisms, enabling them to see emerging technologies and forge early collaborations.
The digital transformation has led to an increase in both M&As and strategic alliances and collaborations. Small and medium-sized entities no longer have to be absorbed by larger organizations; instead, they can frequently simply join forces and make use of each other’s markets, products, and services.
According to Marktlink managing partner Jonathon Parkinson, the increase in financial options is one of the major advantages of joining forces with a bigger business. He affirmed that utilizing cross-selling opportunities is a potent strategy for realizing revenue synergies and fending off competition because it allows businesses to expand their market share of current clients and get access to new markets.
Parkinson also noted that while business consolidations and procurement can both accomplish comparable things, partnerships frequently rely on ongoing cooperation and carefully cultivated connections, which makes it difficult to offer the security that supports M&A. However, he explained that the financial risk that M&A investors face inspires a stronger commitment and a long-term drive to succeed.
In the rapidly expanding space of the fintech sector, five years is a very long time. From one month to the next, fresh modifications seem to completely modify the area. According to some industry experts, the global financial market will likely look drastically different in five years, with fintech dominating the financial services industry and purchasing numerous companies.
Buckworth mentioned that as Fintech gets steps closer to that, the community should expect companies like Revolut and others to absorb all the latest technological advancements and grow into enormous international corporations.
Another development that should be expected is the ownership of traditional banks by fintech companies, with the majority of branches closing.
Buckworth pointed out that, unlike fintech companies, traditional banks face greater costs because of their conventional business locations, in addition to high staffing costs. He mentioned that we should look forward to fintech procuring existing banks, or at least portions of these, as a strategy for gaining consumers.
Lastly, Buckworth indicated that regulators and authorities will be crucial in fostering technological innovation and promoting healthy competition. He mentioned that Open Banking and the Revised Payment Services Directive have previously helped accelerate the adoption of fintech in the UK by enabling interoperations and outside access to data. He added that such actions will aid small and medium-sized enterprises to engage outright competitions with well-established institutions and will guarantee continuous upward trend for M&As.