Has payment tech M&A gotten too pricey?

The soaring valuations of tech and payment firms have made it hard for some to grow through acquisition.

"As for M&A, everything is too expensive right now," said Chen Amit, CEO of Tipalti in San Mateo, California.

Tipalti's most recent acquisition came in April 2021 when it bought Approve.com, a cloud procurement company with technology that helped Tipalti automate more steps in the accounts payable cycle. Valuations for payment technology companies skyrocketed over the past year, pushed by a wave of public listings and record venture capital investments.

While payment experts aren't calling it the return of a dotcom-era bubble, there is the risk of a pullback in the short-term, if it's not already underway.

"At some point there will be a shake-up and more opportunities for M&A," Amit said. "I think when some air gets out of the market."

Many of the financial technology companies that went public over the past year — including Payoneer, Coinbase, Marqueta and Affirm — have traded their stock at lower values toward the end of 2021 and early 2022.

Among more established payment technology companies, Block (formerly Square), is trading more than 45% off of its highs as of early January; and Jeffries recently downgraded PayPal. Both companies are suffering the downward effects of inflation on consumer spending and a slowing in the rate of e-commerce growth as shoppers return to brick-and-mortar stores.

These stock price drops for public companies come as valuations for privately held payment technology firms soar. Investors poured more than $91 billion into fintech firms in the first nine months of 2021, according to CB Insights, which is roughly the same as the prior two full years combined. The third quarter alone produced more than three dozen new fintech unicorns, or firms valued at more than $1 billion, pushing the full-year total of new unicorns past 200.

"There has been a tremendous increase in the amount of venture capital available to be invested in tech startups because the venture capital asset class has outperformed other asset classes over the last five and ten years," said Janet Bannister, managing partner at Real Ventures in Toronto. The shift from in-person to remote meetings has increased the number of investors that companies can speak with, and the ease of having those meetings has increased the speed of making decisions and heightened the competitive nature of fundraising, she said.

Among privately held payment technology companies, Stripe has the largest valuation at more than $95 billion. Stripe's valuation has grown from $20 billion in 2018 to $95 billion in 2021 following a series of investments, according to Crunchbase.

Other highly valued privately held fintechs include Klarna, which has a $45 billion valuation, up from $11 billion in September 2020. Revolut's valuation at the end of 2021 was $33 billion, compared to $5.5 billion in 2020. Chime's valuation has jumped from $15 billion to $25 billion in the past year, while Plaid's valuation of $13 billion is nearly $8 billion higher than the price Visa agreed to pay for the account aggregator before the acquisition fell apart under regulatory scrutiny.

Even if the market doesn't bring deal prices down on its own, government pressure could play a role. The Federal Trade Commission and Department of Justice Antitrust Division are seeking public comment on antitrust enforcement, suggesting greater scrutiny of large deals.

Firms that have high growth rates but aren't yet profitable, or have low profit growth, are starting to lose their shine, according to Greg Martin, co-founder of Rainmaker Securities in Los Angeles. Higher interest rates and digital payments growth that has not matched lofty expectations has challenged some companies, Martin said.

These firms' high valuations will lead to pressure for some companies that go public or seek a buyer, according to Martin. The "exits," or value upon sale or public listing, for venture capital investors may also be lower than expected if the market believes the valuations are too high, according to Pitchbook. The overall market for payment technology companies is "still hot, but not as hot" as it was in 2021, Martin said.

"There has been some rationalization in the market," Martin said, noting there are still more than 400 technology companies across all sectors that have filed for potential public listings in 2022, possibly yielding $73 billion billion in proceeds. And there's several major payment technology companies that could go public soon, including Stripe and Plaid.

"The potential pipeline is pretty large," Martin said, stopping short of categorizing the current market dynamics as an asset bubble.

Tipalti has also seen its valuation jump. Tipalti in December raised $270 million that vaulted the company's valuation to $8 billion from $2 billion in October 2020. Tipalti's services include digital B2B payments for middle market companies, generally those with yearly revenues between $1 billion and $10 billion.

Amit said that while valuations are making fintech companies more expensive, he believes Tipalti's own target market and use case has room to expand. Nearly two-thirds of all B2B payments are still made by paper check, according to Goldman Sachs. And one of Tipalti's main competitors, the publicly traded Bill.com, is currently trading higher than at the start of 2021.

"The field out there is ginormous for digital business payment growth," Amit said, adding that Tipalti plans to invest as much internally in its AI-driven payments technology in the next 18 months as in the past 10 years combined.

"The mid-market is particularly challenging," Amit said. "They have needs that are more like larger enterprises, yet they execute like a small business."

Whether the valuations are too high of course depends on the individual company. Stripe, for example, is well positioned to benefit if e-commerce continues to expand and diversify in the long term, given Stripe's range of products and markets, according to Martin. Stripe has said it's not planning a public listing, but it has also hired advisors for a potential IPO.

"Whether valuations today are high or whether they are very low, we will only know in hindsight," Bannister said. "Ten years ago, people thought Facebook and Amazon were overvalued. Since then Amazon's stock has increased tenfold. And Facebook is now worth more than $930 billion. While not all early-stage tech companies will succeed, I am very bullish on the opportunity that early-stage tech companies represent."

Sal Rehmetullah, president and co-founder of Stax, a payment technology provider based in Orlando, Florida, argues the payment technology market isn't too high despite the stock pullbacks.

"Multiples are higher than historically and the public markets are course correcting," Rehmetullah said, adding that the convergence of software and payments is showing the opportunity in the fintech space. "We continue to believe this will outpace the general market."