This trend has become more prevalent in the last two years and is increasing along with the scale, reliance and value of IT systems within an organisation’s infrastructure.
“Several US-based investors are buying Australian fintechs that can be commercialised through established global networks.”
Dealmakers need to obtain a full, early understanding of how IT can impact deals and the additional risks and costs that may emerge and add significant management cost for organisations.
Without proper planning and due diligence, the acquirer could buy a service that looks great on paper but will cost a lot to fix or replace the moment it falls over. However, with careful planning, this risk can be managed.
Increasing importance of technology in financial services
Like many industries, financial services has had a heightened focus on technology and digitisation over the last 18 months. Customers are more reliant and more comfortable with digital transactions, largely accelerated by the pandemic. The industry has also seen the introduction of Open Banking and client experiences being centred around online rather than face-to-face sales.
As a result, there is increasing interest from overseas investors in Australian fintech. For example, several United States-based investors are buying Australian fintechs that can be commercialised through established global networks. This is typified by Square's acquisition of AfterPay in 2020.
In addition, domestic players - including ASX listed companies - are acquiring existing technology businesses in order to enhance their online offering. The Square-Afterpay merger, the tech-nimble Judo and the move by other ASX 100 companies to recoup their fintech capital expenditure through third-party commercialisation all represent significant challenges to the established Australian banks - which account for 80 per cent of the Australian deposit and loan market.
And, as banks and other financial services institutions continue to streamline in the wake of the Royal Commission into Banking and Financial Services, we are seeing demerging and divesting non-core businesses to fund more investment in fintech and to meet the challenges of the new entrants head on.
This is driving a very active venture capital fintech market in Australia and valuation multiples continue to rise. Venture capital exits present an opportunity for buyers to acquire someone else's technology to boost their IT platforms. This bypasses the slow burn of internal technology development which often requires significant capital expenditure commitments but carries the risk of delays and uncertain functionality and user experience.
For organisations where technology is their central product, IT considerations are front of mind during any transaction. This is particularly the case if the target is technology or software-based and outsources any of its core capabilities.
However, for those financial services organisations that use technology to enable what they do, IT is often not prioritised during their transactions. It's here where costs can blow up.