Guide to Payment M&A
Preliminary discussions to indicative offer
At this early stage of the transaction, a potential buyer should be thinking at a high level about issues that are or could become deal-stoppers or gating issues. Here we outline what some of those may be:
Intellectual property (IP) and data considerations
Data privacy. Given the ubiquity of payment processing systems, risks associated with data privacy issues or data breaches, can be costly and damaging for a company’s reputation. The sophistication of a target organisation’s data privacy function may be a gating item due to potential liabilities and reputational risk of non-compliance.
Open-source software (OSS). The use of OSS is extremely prevalent in payment companies and although available free of charge, OSS is still subject to license terms, some of which can be onerous. A buyer should be aware of the potential litigation exposure for non-compliance with OSS licences and understand the risks associated with OSS use before proceeding with an acquisition.
Ownership of proprietary IP. Does the target develop its own systems? Does a proprietary IP portfolio underpin its value proposition? Understanding the scope of IP that is critical to the business at an early stage will guide the focus of the diligence to follow.
One early question to consider on the people side is whether there are any ‘superstars’ on which the business depends. The loyalty of clients and the workforce might hinge on that person’s continuing involvement, and whether they form part of the deal will therefore be a critical issue. Second, the success of an integration, particularly in a people dependant business, can rest heavily on cultural factors. Where future integration is a critical part of the buyer’s plans, a fundamental question will be whether it believes the culture of the target business is compatible with its own.
AML and related risks
By their nature, companies operating in the payments space are more susceptible than others to falling foul of the anti-money laundering (AML) laws, controls relating to counter-terrorism financing (CTF) and financial sanctions regimes. Given this, some ‘gating’ questions along with initial searches to ascertain whether the target has been the subject of any AML, CTF or sanctions investigations or findings in the recent past should be considered and may impact a buyer’s value analysis and its decision as to whether to proceed with the transaction.
Merger control (antitrust) considerations
The nature of the payments landscape and incentives to scale up means that understanding the antitrust position in relation to the target is critical at an early stage. To start off, undertaking a multijurisdictional filing analysis to identify where merger control filings and/or voluntary filings are required, should be considered. This will be key for managing the deal timetable as for many jurisdictions a considerable amount of upfront work is required before filing.
An important part of the initial assessment will be understanding whether there will be any substantive competition concerns due to increasing focus of authorities on nascent competition, as that will determine considerations around deal structure and transaction terms. Of particular importance will be, understanding the position of your potential co-investors or consortium partners.
Foreign investment filings considerations
Transactions and investments in the payments sector are subject to scrutiny under FDI regimes. To mitigate this risk conduct a high-level feasibility study early in the deal to assess where FDI approvals may be required and assess the risk of substantive FDI concerns. The high-level feasibility study will involve understanding: (i) the target group incorporation (and all subsidiaries within the transaction perimeter); (ii) the location and nature of the target group’s assets; and (iii) any government contracts the target may have. Whether there is a significant risk of authorities requiring mitigation measures/remedies to approve the transaction will largely turn on: (i) the nature of the target’s activities and any ‘vulnerabilities’; and (ii) an investor’s (or co-investor’s) risk profile.
Financial services regulatory considerations: upcoming developments
Buyers should also be aware of upcoming regulatory developments as these can go to the heart of the value analysis of the target and potentially constitute gating issues or deal-breakers.
Some key regulatory trends in this area include:
- There is an increasing focus on the operational resilience of financial services companies to disruption events. In the UK, a set of rules and guidance relating to operational resilience have been developed and came into force on 31 March 2022. In addition, the EU is in the process of introducing a proposed regulatory framework on operational resilience through the Digital Operational Resilience Act.
- A growing number of regulators around the world are exploring the impact of Central Bank Digital Currencies (CBDCs). A CBDC would transform the UK’s payments infrastructure. This could result in significant opportunities but also threats in the payments space, including by enabling cheaper and faster cross-border payments.
- In February 2021, the FCA concluded the Woolard Review on the unsecured credit market consultation and recommended that legislation be brought urgently to regulate ‘buy now, pay later’ products. Where the target offers ‘buy now, pay later’ products, buyers would need to monitor developments in this area closely.
Holly Insley Partner
Ali Kirby-Harris Partner
Rikki Haria Senior Associate
Tom Hingley Senior Associate
Hannah Family Associate
Maija Hall Associate