The Acquisition Frenzy Has Begun. . . What's Your Plan?
My career started in the mid-’90s at Capital One, a company many now call the first Fintech. I held a number of roles through the years – finance, subprime credit card, and auto – with my longest stint being in Mergers and Acquisitions. We were a juggernaut and had the winds at our back, but still acknowledged that dangers could lie ahead. This delicate balance frequently led strategic discussions back to a single core debate: should we acquire, or should we look to be acquired?
There were a series of questions we wrestled with on a daily basis that informed our stance and outlook on this broader deliberation. Chief among those was understanding how we would fare through an economic cycle. Falter at the wrong time in the economic cycle, and you will be acquired for a song. You must either sell when the time is right, or acquire to gain the capabilities you need to weather a storm. Those capabilities can be broken down into components:
Funding Stability: If wholesale market funding dried up, how would we fund the business?
Diversification: Were we just a credit card business and completely susceptible to unsecured credit market performance, or did we need to spread our bets across additional product lines (auto, installment, mortgage loans, and even more exotic options like cell phones and flowers)?
Growth: Would we start buying growth through other platforms, or would we be someone else’s target for growth?
Liquidity: We were public but had two leaders that were substantial owners of the company’s stock. How would they view the opportunity to get a premium and full liquidity through an acquisition?
Some additional considerations included:
Scale: How to achieve scale in an increasingly national business?
Technology: As the company began calling itself a technology company with a bank charter, did acquisitions become a means of acquiring scarce technology and premier design talent?
Talent: Did our advanced analytical talent base present an opportunity for other larger banks to acquire a scarce commodity of human resources in our industry?
As I go through this list of M&A goals we considered, they almost exactly mirror the considerations that we see in today’s market. As Ally purchases CardWorks to enter the subprime credit card space, we look at growth, margin expansion, and diversification. As the wholesale funding market-focused Lending Club buys Radius Bank, we recognize a response to the same monoline and funding risk mitigation that Capital One sought two decades ago - protecting the future of the business by effectively purchasing access to stable and low-cost consumer deposits via a bank charter
New rationales are emerging as the data economy has expanded beyond Capital One’s early leadership. Visa’s purchase of Plaid grants them access to checking account data, a missing link to the otherwise information-rich ecosystem of merchant and issuer transaction data. Similarly, Intuit’s acquisition of Credit Karma represents an interesting merge of tax and credit bureau data to further refine their combined ability to target customers with the products best fit for them.
History, as it always seems to do, repeats itself, particularly in the cyclical banking industry. The past few years have already seen rapid consolidation in the bank and credit union market, and now there seems to be a run on the fintechs. Banks are starting to look to secure their future growth platforms and prepare for the world of banking without branches, and fintechs are seeking security and liquidity. As we inch closer to the end of a 12-year benign credit environment and an era of slow organic growth, the stakes suddenly look higher to all the players. As the most coveted properties are getting snapped up, we suggest asking yourself the same key question we are addressing for our clients, both acquirer and target – What’s your strategy for being in the right chair when the music stops?
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