Tale of the Tape: Think You’re Evenly Matched? Doubt it. - Payments & Fintech Deal Negotiations

Adam Hark |

You’re a new boxer/fighter. You started training one year ago. Now, imagine entering the ring for your first true bout. Your opponent is equally matched in height, weight, speed and reach. It appears to be an even match – even to the casual observer. You feel good about your chances as you size up your opponent. You got this - there’s nothing you see that gives your opponent an advantage over you.

The bell rings. You engage your opponent in the center of the ring. After a couple of probing jabs, you decide to take a shot. But before you land your cross, your opponent has already parried your punch, and countered with a cross of his own. You’re careering to the mat, not realizing what just happened. You awake from your haze to the sound of a bell ringing. Your opponent won. You lost. And now you’re searching for answers as to how you got knocked out.

Welcome to today’s marketplace of payments and payments technology mergers and acquisitions, where in many instances, the playing field between buyer and seller negotiations simply isn’t level.

In the analogy above the result was predictable. You were finished before you started. Not because your opponent cheated. And not because your opponent did anything untoward. The reason is simple: at first glance you assessed your opponent and deemed him to be an equal, but he wasn’t an equal at all. Your opponent was a highly trained, well-educated fighter who’s been boxing for years, and had trainers who collectively represented 60 years of boxing knowledge. Your opponent realized what you were trying to do before you did it - and he delivered the knock-out blow. In fact, contrary to what you believed to be true upon your initial assessment, your opponent was never on your level. He was two moves ahead of you the entire time.

US Private Equity Deal Sizes Skyrocket as a Result of Sustained Fundraising and Build Up of Dry Powder – Pitchbook – July 2018

Much of the payments and fintech M&A activity in 2018 is being driven by Private Equity (PE). PE’s approach to deals has been manifold: minority investments through growth capital and/or equity, indirect, majority investments through financing the acquisition initiatives of their existing portfolio companies, or direct, majority investments in stand-alone platforms. This PE driven activity has been a boon to payments and payment technology valuations and the sheer number of M&A transactions that have taken place. Private Equity has created one of the greatest market environments for these types of properties in a generation. So, we (owners who are selling, and transaction advisors like myself) ought to be grateful for the wonderful market dynamic they have created. And in fact, I am. And so are many of the clients I represent.

But…

Like the boxing analogy above, as a seller, you really need to understand who your opponent is. That’s not to say that Private Equity, or any other type of buyer, should be seen as your opponent per se, but there is an adversarial - in the two parties fighting for a deal structure and valuation that reflects each party’s own best interest sense - dynamic inherent in the negotiations between buyers and sellers in all transactions, and every seller needs to understand the implications of this before they enter into initial discussions and negotiations about being acquired.

Take a look at any leading PE firm’s “Team” page, and from their Associates on up to their Partners, their educational credentials read like a “who’s who” from the top MBA programs in the world. Now, I would submit to you that one’s formal education isn’t the primary attribute of a good negotiator or deal maker (personally, I believe experience is). That being said, the private equity community has been extraordinarily successful at mining the best financial minds coming out of higher-ed degree programs, and those degrees are relevant and meaningful in the mergers and acquisitions business.

And as to experience, look no further than the bio pages of the higher-level PE team members. It will give you a very good sense of their competency - in most cases they possess a long track record of transactional success that’s substantial and on-point.

The takeaway here is simple. From Associate to Partner, Private Equity personnel are highly sophisticated operators, evaluators, analysts, and negotiators. And so are the CEO’s and M&A teams of large strategic firms who are actively making acquisitions in the payments and fintech space. So, I ask you, when entering into discussions about a transaction to sell your company, are you really at their level, or does it only appear that way?

You need to ensure that you don’t wind up on the mat like our boxer friend above.  

Adam T. Hark is Managing Director of Preston Todd Advisors. With over a decade of consulting in the payments and financial technology sectors, Adam advises clients on M&A, growth strategy, exits, and business valuations. Adam T. Hark can be reached at adam@prestontoddadvisors.com or 617-340-8779.