Viewpoint: Consolidation and Asset Extension
By Lee Britton, Prepaid Financial Services
One of the great things about getting old is hearing new phrases defining old concepts. Chances are, by the time 2013 has been and gone, you’ll have come across the above phrase, specifically around payments or technology.
But first, it’s important to recognize two apparently irreconcilable differences: What someone thinks something is worth and what someone wants to pay for it.
On the selling side, 1+1 equals 3, 4 or 5. As a seller, we want to be valued on x times earnings (range 4-32), or y times revenue (range 1-6). We want the buyer to recognize our growth, our model, our technology, our position.
But what’s that you say? That’s bad math? 1+1 in a still-embryonic market where opportunity has been superseded by the absolute knowledge that capital has been used and produced, by and large, very little return. (Show me a prepaid company globally that is producing close to triple-digit growth in revenues or EBITA.)
|“There is almost always a willing purchaser that has a strategic or tactical reason why the consolidation play makes sense, and that changes the economics.”
—Lee Britton, Prepaid Financial Services
To a private equity buyer, the equation is 1+1 equals zero but may be an “earn out.”
Consolidation (mergers and acquisitions) usually means “initial payment and an earn out.” “Earn out” is usually defined as when a buyer says, “If you manage to turn this pig’s ear of a company around, I might pay you something;” whereas, initial payment usually means “We will take on your debts or cover the capital that has been consumed to date.” But I believe 2013 will bring about the golden phrase “asset extension,” which is a new phrase some M&A and investment bank teams are using to justify inflated prices.
You can value a business on earnings (EBITDA), turnover, growth, assets, technology and myriad other smoke-and-mirror estimations. But the truth is, there is almost always a willing purchaser that has a strategic or tactical reason why the consolidation play makes sense, and that changes the economics.
Asset extension underpins this approach. Asset extension usually can be broken down into:
- Channel extension
- Product extension
- Brand extension
Channel extension. A processor or program manager operating in one region has potential to expand in other regions (processors are certified region by region). Channel extension is the ability to replicate the business elsewhere, giving it scalability and, hence, extending the core asset. This is expansion of your business into new markets, without expanding the core product range.
Product extension. A technology company can build off the back of its existing products, so a program manager or processor is able to leap from cards to NFC to mobile, for example. By the same token, an issuer can become an acquirer or also diversify into technology or program management or processing. Or, a prepaid provider of fuel cards might extend its products to also include GPR scheme-branded cards.
Brand extension. Let’s say a company with a high profile in North America wants to expand into other regions. It can build the business, it can do market penetration analysis, it can look at the 4 Ps (product, price, promotion, placement), it can recruit, etc. Or, it can consolidate by buying an existing business in the new region.
True consolidation plays tend to revolve around either a strategic tie-up (two different but complementary businesses) or around cost reduction (eliminating overheads, resources, to provide the same service with less cost).
So, 2013 brings a host of reasons we’ll see consolidation occur in payments—absence of growth capital for small cap companies; absence of “true” profitability in existing businesses in prepaid, particularly in Europe; and asset extension potential for companies looking to expand.
Lee Britton is the commercial director for Prepaid Financial Services, a program manager and e-money issuer in the U.K. Previously, Britton served as executive vice president of Muscato Group, but he made his name in prepaid as CEO of Altair Financial Services, an award-winning transaction processor and program manager for international prepaid programs that was acquired by M2. He can be reached at email@example.com.
In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.