In the debate to build or partner to develop new technologies, some large banks are choosing a third option: acquiring the technology company along with its talent.
So far, it’s a space dominated by the largest acquirers seeking bolt-on transactions that enhance their capabilities. Kara Baldwin, a partner at Crowe LLP, says that only the largest entities will be willing to buy technology companies. “You will find fewer of the mid-sized and smaller institutions that are willing to make these kinds of purchases, and would prefer to partner or purchase an already proven technology product.”
These deals are few in number — just 13 technology companies were acquired by banks in the period examined by Bank Director, from Jan. 1, 2017, through year-end 2018, according to data from S&P Global Market Intelligence.
The top five technology acquisitions feature deals in which the technology company or product purchased fulfills innovation or strategic goals at the acquiring bank. We then examined and ranked these deals further based on their strategic impact on the organization, talent acquired and continued investment and growth of the asset. Bank analysts were also consulted.
KeyCorp’s acquisition of HelloWallet topped our ranking, and it started out as a partnership. HelloWallet wasn’t working with banks at the time, but Key saw the potential to extend the platform to its millions of customers, says Dennis Devine, president of Key’s consumer banking division. After becoming HelloWallet’s biggest customer, Key decided to acquire the platform, completing the transaction in June 2017.
Key has integrated financial wellness throughout its customer relationships, both digitally and in the branch. “That client impact is huge,” says Devine. “It’s not just banking; now we are offering advice to improve the wellness of our clients.” That mission-driven focus inspires employees, he adds.
The Washington, D.C.-based HelloWallet team still works out of the same offices, which are decked out like a fintech company, not a bank, says Devine.
Given the high level of competition facing the industry, using technology to build stronger relationships based on the financial health of the customer is a key differentiator. “We wanted to build a value proposition that was organized around, ‘How do we create a motivation for our clients to want to have a dialogue about their entire relationship, where we can bring the power of data and analytics and digital tools so that there’s value as soon as the client interacts with us,’” says Devine. “That’s what financial wellness creates.”
The advice builds the relationship; the relationship drives revenue for Key.
HelloWallet isn’t the only KeyCorp acquisition to appear in our ranking: In June 2018, the bank acquired Bolstr, a small business lending platform. Key can now accept and process loans faster, with less paperwork. That deal wasn’t as integral to the bank and placed fifth in our ranking.
“Key has approached the M&A environment as a means to add people, product, capabilities into the mix,” says Scott Siefers, principal, equity research at Sandler O’Neill + Partners. “I’d view [these transactions] as small, low risk, bolt-on deals that [helped] the product suite.”
Coming in second, JPMorgan Chase & Co.’s acquisition of the payment processor WePay, in November 2017, probably generated the biggest buzz among the deals analyzed for this ranking.
The deal made strategic sense for JPMorgan, says Brian Kleinhanzl, a managing director at Keefe, Bruyette & Woods. “They’re trying to build out their payments and functionality within the payments space,” he says. “Longer term, I think there are still questions about the payments space overall and the risk of being disintermediated in that space, so I think you have to hold judgment on the deal to see how the payments landscape unfolds.”
JPMorgan is making the most of the talent gained in the transaction. WePay’s executive team stayed on to lead the unit, and the big bank constructed a 10.17-acre innovation hub in Palo Alto, California, to house WePay and JPMorgan staff.
So far, WePay’s culture and innovation have remained intact, according to WePay Chief Operating Officer Tina Hsiao. JPMorgan CEO Jamie Dimon told WePay staff, “‘Don’t let the big bank bog you down, because that’s not the point,’” she told CNBC. “He encouraged us to continue to push through and influence them.”
WePay isn’t the ranking’s only payments acquisition. U.S. Bancorp has made a series of acquisitions in that space, including ETS Corp., an acquisition made through U.S. Bancorp’s Elavon unit in August 2018. The fourth-ranked deal enhanced Elavon’s e-commerce capabilities and added more merchants in new verticals as customers. Before the acquisition, ETS was a long-time vendor to the bank.
In presentations, U.S. Bancorp Chairman, President and CEO Andy Cecere has noted the lucrative role payments services play at the bank, since they are capital-efficient sources of fee income that also generate deposits. As of May 2019, payments comprised 29% of U.S. Bancorp’s net revenue.
“[B]anking’s always been lending and deposit taking, but a bigger component of banking or financial services is money movement and payments,” said Cecere in May 2019. “Having Elavon as part of our pie of offerings is a great benefit to our customer base.”
State Street Corp.’s October 2018 acquisition of Charles River Systems is the largest transaction analyzed in the ranking, with a purchase price of $2.6 billion. Whether the expected revenue synergies will justify the high price remains to be seen, says Kleinhanzl. The deal is expected to be accretive to 2020 earnings, and placed third in our ranking.
With the Charles River acquisition, the Boston-based bank offers the industry’s first-ever front, middle and back-office investment management platform. It has since beefed up the platform’s risk analytics capabilities through partnerships with Axioma and MSCI.
“It’s a big bet on the future of the industry and moving to proprietary end-to-end solutions, and it remains to be seen if that’s where the industry’s going,” says Kleinhanzl.
How They Ranked: Best Technology Acquisition
|ACQUIRER NAME, LOCATION / ASSET SIZE||TARGET NAME||DEAL DATE||SCORE|
Cleveland, OH / $146.7 billion
|Jun. 30, 2017||1.86|
|2||JPMorgan Chase & Co.
New York, NY / $2.7 trillion
|Nov. 30, 2017||2.00|
|3||State Street Corp.
Boston, MA / $244.6 billion
|Charles River Systems
|Oct. 1, 2018||2.71|
Minneapolis, MN / $481.7 billion
|Aug. 22, 2018||4.14|
Cleveland, OH / $146.7 billion
Small business lending
|Jun. 20, 2018||4.29|
SOURCES: S&P Global Market Intelligence, bank filings