We’re back in the capital markets for this week’s Fintech Focus Podcast, and it’s a good one—perennial BZ Awards judge and partner at Marlin & Associates Michael Maxworthy joins us for an assessment of the state of fintech M&A.

Maxworthy’s firm has advised a number of fintech deals this year—most recently when digital banking startup Zenmonics accepted a minority investment from Fidelity National Information Services, Inc. (NYSE: FIS).

Spencer White: 00:00 Welcome to Benzinga’s Fintech Focus Podcast. Your weekly dive into the world of fintech. Featuring conversations with leaders on the front lines of the financial revolution.

Spencer White: 00:12 Hey fintechnicians, welcome back to your favorite fintech podcast, the Benzinga Fintech Focus. We have an interesting perspective for ya on the show today. So, looking back, we realized we ask a lot of entrepreneurs on the show what their exit strategy is. We always wanna know what they think about industry consolidation, M&A, exits, so on and so forth.

Spencer Israel: 00:44 So naturally we thought we should bring in an expert on M&A, especially in fintech, who can give us insights on the conditions in the space, and where M&A trends are going within fintech.

Spencer White: 00:56 So, we’re super excited to interview Michael Maxworthy, who is a partner at Marlin & Associates, a mergers and acquisitions banker, and perennial BZ Awards judge, on what we can expect regarding the future of fintech.

Spencer Israel: 01:08 Alright and as I do before every episode, I’m gonna thank WeWork, for letting us use their podcast space here in downtown Detroit, and without further ado, here is our interview with Michael Maxworthy.

Spencer White: 01:23 Alright everyone welcome back to the Fintech Focus podcast. We are here with Michael Maxworthy, colloquially known as Max, partner at Marlin LLC, here to talk about fintech M&A. Thanks for joining us today Max.

Max: 01:36 Thanks for having me.

Spencer White: 01:37 Awesome. So I’m gonna hand over the mic to you Max, tell us a little about yourself, and also tell us a little bit about Marlin, you know talk about your thesis, which companies you’ve worked with, deals you’ve advised, give us sort of a history of your firm’s activity in fintech.

Max: 01:56 Sure. So the story is relatively simple. We’re a global boutique investment bank, helping companies be buyers, be sellers, raise capital. Sometimes we do some corporate finance work and help em figure out what they wanna do when they grow up. My partner Ken Marlin and I started the firm about, oh going on 17 years now, specifically focusing on financial technology and financial information firms at the time. Mostly because of Ken’s operating experience running the financial technology practice at Dun & Bradstreet during the 80’s and 90’s. So companies like Moody’s, IDC, essentially all used to report to him inside that division. So he’s had very huge kind of PNL responsibility as well as product development and the like through the fintech, fin-services space over the years.

Max: 02:49 I got to know him after I did a stint at Morgan Stanley, and then I went to Veronis Suhler Stevenson which is a big private equity house here in New York back in the late 90’s. Ken left D&B in the mid-90’s, went off and ran what is now called SIX, but it was called Telekurs back in the day. He … once he was in there he decided that he actually wanted to be an entrepreneur himself, so he bought a piece of Telekurs, bought a piece of Nomura, bought a piece of S&P at the time, renamed it Telesphere, built it up, got some VC money, and then essentially sold that to what was Bridge, and then Bridge went through many many iterations over the years, and I think it ended up at Reuters, at the end of the day.

Max: 03:38 Ken and I did a couple of deals at Veronis together, and then in 2001 we decided to form a pure advisory shop helping companies on the lower end of the middle market, when back then a lot of the bigger banks were focusing on bigger deals, and we thought the lower end, the middle market was gonna get left behind. We were one of the early kind of banks to focus on the financial technology space, and essentially that’s still the heart of our deal-flow since then. We’re now three offices globally, doing about 10 to 15 deals a year. Some of the deals that we worked on that kind of put us on the map was … we were one of the first investment banks to ever sell a company to Bloomberg. This was back in 2006. We sold em a Swiss-based public company called Brainpower, it was essentially a very high-end wealth management platform, publicly traded. This was back when you know essentially Mike had come out previously before becoming mayor and said, “I can build it better than I can buy it,” and we were one of the first banks to ever kind of crack that nut.

Max: 04:44 Some other notable deals that we’ve done, we were on the buy-side for Blackstone and Goldman when they originally bought Ipreo, and then we all know that just got sold to IHS Markit. I’ve done more than a couple of deals with the Aquiline team, Sequoia, TCB, you name it, some of the who’s who inside the fintech private equity VC space, we’ve been involved with. As well as, I think, think we’ve sold five or six businesses to Thomson Reuters, five or six to Morningstar, more than a couple to FactSet, and the like. And that’s us.

Spencer White: 05:21 Sweet, sweet. So let’s dive into some thought leadership here Max. What’s life like on the inside of fintech M&A? Like what kind of patterns are emerging right now? You know the space is still, it’s sort of … as we see it it’s in between emerging and mature.

Max: 05:37 Well I guess that depends on how you define emerging and mature. I know that’s a cliché. In my mind the fintech space has kinda had its ups and downs over the years, and I can go back all the way to the SIFMA conferences back in the late 90’s, when proprietary data analytics and essentially database and content-type companies were all the rage. Well, guess what, they’re back. If you can find a very hard-to-find dataset that’s incredibly intensive to get a hold of, actually you can command a lotta money when you go out and either raise capital or you know maybe a Thomson Reuters or a Linedata or a SS&C or a Fidessa or somebody is coming to look at acquiring it. The harder it is, the more proprietary it is, the more people think they can get Alpha out of it, the more they’re gonna pay for it. And that usually shows up as PNL, and justifies a lot of the valuations that we’re seeing nowadays.

Spencer White: 06:36 So, and do you think that’s why there’s a deal like Blackstone buying the TR data businesses and rebranding it as Refinitiv?

Max: 06:46 Well, I think that there’s … that makes me think about the Ipreo case that we did with Blackstone and Goldman, where Goldman and Blackstone had a big idea that this could be pushed through their entire partner network to help with sales. I think Blackstone’s got that same idea now. Not only are they maybe under-utilizing the product sets internally, but they think that some of the partnerships, relationships, and network that they’ve got, they can help use that, to help push sales and push market share through that.

Spencer White: 07:14 Got it, got it. So moving to another big player in the fintech space, PayPal is gobbling up companies. They’ve something like a $3 billion M&A budget this year, they’ve already spent at least two. For someone in your position do you see these as strategic moves that do fit with the core companies of a business like PayPal, or are they trying to chase trends, or what’s your take on that buying spree?

Max: 07:37 Well the buying spree I think is actually bifurcated into two spaces. One is, they’re spending a lot of money on big acquisitions. I forget the name of the company they just bought, it was like a week or two ago, [inaudible 00:07:50] if you can look that up, but on the flip side of that they’re taking a more a corporate VC investor kind of spend as well. Where they’re dipping their toe in the market with maybe a 5 or $15 million investment, or maybe seed deal. Where they’re trying to stay ahead of the trends that way, as well as being conscious of their fiduciary duty as investors inside that space.

Max: 08:17 You’re gonna see a lot of that inside the insurtech space nowadays where, I can’t tell you how many new kind of corporate VC funds have popped up over the last couple of years. A couple are doing very very well, kind of like Transamerica Ventures, I’d say AXA is doing a lot of stuff, especially in Europe. And it’s not necessarily that they’re looking to acquire these businesses, but they’re looking to see what some of these new up-and-coming businesses, their different take on the market, their different take on business models, their different take on essentially how to serve their customer base. And it may ripple through the rest of the firm, it may not, but a million or $2 million here and there, you know it’s a good learning curve, a good learning experience for them, and if there’s something that they may have missed out on over the last couple of years, like PayPal, and Simility which I think they just bought, then yeah they’re willing to pay up.

Spencer White: 09:12 Interesting, and sort of … so other fintech companies are sort of taking a similar approach, a company like Acorns, they realized they wanted a product in the IRA space, rather than build it themselves they bought another startup, Vault. So there’s a little bit of consolidation even on sort of the smaller end of the scale. Do you think that a company like Acorns buys Vault because their customer acquisition cost is too high, so it makes more sense for them to just buy a company to access a whole new market, or is it something else?

Max: 09:41 Well, two things on Acorns, and essentially I’ll just talk about robo-advising in the wealth management space in general. A lot of those companies are, if you actually look at the history, they’re still quite young. And there’s a tremendous amount of investment that has to go into those type of businesses before they reach any type of economies of scale. So in the very beginning of these businesses yeah, [inaudible 00:10:01] is gonna be huge. I also think that they’re smart enough to look at this thinking, “Okay, what else do my customers need that I might not necessarily want to build myself, that I’ve got the capital and the backers behind me?” especially Acorn, with some of those fantastic top tier names behind them. What can I go after now to help juice, maybe my, not necessarily [inaudible 00:10:27], but I think more on customer engagement and the longevity of some of those customers, where it is easy to switch off some of those platforms and they’re looking for kind of lock-in periods to extend that. And an RIA platform like that is, I think it’s a great fit for them.

Spencer White: 10:46 Yeah totally, you know if you’re young and you use Acorns to get started in investing, what’s your reason to stick with a product once you get more sophisticated, but then the IRA does that. Makes total sense.

Max: 10:58 Yeah so you’re also hitting on a theme for the RIA space, where if you look at, we just did a deal with Aquiline, where we helped them buy RIA in a Box. And what RIA in a Box does is essentially two things. One, it helps a lot of the new independent RIA’s set up shop, and it also helps them with a lot of the compliance, and GRC type issues that maybe they’re getting a little bit more of a headache at some of the bigger firms that they’ve been with. So one of the trends that we’re seeing is there’s a lot of new independence coming into the market nowadays. Which is the complete opposite of what I would’ve said maybe three or four years ago, when I saw the rise of the robo-advisor where people didn’t wanna talk to people. People didn’t wanna actually talk to a human about where they should invest or what their appetite for risk is and the like. A lot of these bigger names are coming out of shops, like UBS and the like, and maybe having an anchor or two client, and having you know … and then they’re coming out saying, “I don’t have that infrastructure, I don’t have those people to help me, what do I do?” And then there’s RIA in a Box to help them set up shop, and deal with their clients.

Spencer White: 12:05 Yeah that makes sense you know when you look at a company like … bridging this over to the robo-space like SigFig saying you know, realizing that … when banks realize that there’s an appetite for the people who don’t wanna talk to anyone, investing in technology to [inaudible 00:12:19] that product on.

Max: 12:21 Yeah.

Spencer White: 12:22 Cool. So-

Max: 12:23 I’m curious as to why Betterment hasn’t done that yet, I think Wealthfront has dipped their toe in the market with a couple of product sets like that.

Spencer White: 12:30 Yeah Wealthfront seems … you know we actually interviewed their CEO a couple weeks ago, they seemed like genuinely interested in keeping up with their customers, and sort of pushing them towards certain products that, like [inaudible 00:12:44], and bringing it into a whole suite. I mean Betterment just went with the … they went for the cyborg route, and sort of went backwards, and saying, “Hey you know some of our customers do wanna talk to people.”

Max: 12:56 Where five years ago I think that the mantra of that entire universe was you don’t wanna talk to people, let’s just answer a couple of questions and get going.

Spencer White: 13:05 Exactly. So that sort of is my springboard into talking about misconceptions, and evolution of thought that some fintech founders might have. You’re working with a lot of operating teams on fintechs, what are some of the mistakes and misconceptions that founders and startups are making when they’re diving into M&A? How do you find a buyer and partner who’s right for you?

Max: 13:34 Who’s right for you? It’s a very loaded question Spencer.

Spencer White: 13:42 Make things easy for you man.

Max: 13:43 Well there’s a lot of factors that go into it right. When you do an M&A deal, and a lot of it just doesn’t come down to the financials. A lot of it comes down to the strategic vision of the management teams coming together, the personality of the management teams coming together. The three, four, five year horizon of where each kind of thinks where the combined business could go, that has a huge factor.

Max: 14:08 In some of our cases when we do M&A deals, we advise buyer and seller to go out and have dinner, have drinks, without the bankers, without the lawyers involved. Look the guy in the eye, ask him some of the tough questions that you may have thought of during the management presentation and you just didn’t get to, or maybe just didn’t wanna bring it up in that environment. The bankers and the lawyers, we can sit here and we can financial model all day, and we can legalese as much as we want, but you really just have to have a meeting of the minds of the two businesses, otherwise essentially it’s just gonna fail. Even when you go down to looking at synergies, and product development roadmaps, and the like, if you’re not meeting eye-to-eye on a lot of this stuff … you can hear the frustration in some of the calls. We’ve advised many many companies over the years that just say, “Thanks but no thanks,” and walk away based off of stuff like that.

Max: 14:59 But once you see it actually come together, it creates so much momentum inside a deal that it almost feeds upon itself, with the two CEO’s or the two management teams just keep almost, just keep going. Whether it be getting excited about a new sale that they’re going into, or a new product development that they both wanted to go after, they just didn’t have enough manpower or resources behind em, and now they’ve got some intellectual horsepower to really hit it hard. It’s fun. But a lot of CEO’s think that, especially on the lower end of the middle market, a lot of CEO’s think that … some of the bigger companies, whether that be SS&C, or S&P, or Temenos or something like that, they’re gonna be their saving grace, just because they think they’re a natural buyer ’cause they compete against each other head-on inside the marketplace. And there’s so much more than that, and I think it’s overlooked quite a bit on the M&A front for maybe startup founders or the like.

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Spencer White: 17:03 Yeah I agree. So on the other side of the table, what are some misconceptions that institutional folks have walking into these M&A deals? Is it as simple as what some people think that they can buy their way into a market or out of a problem?

Max: 17:17 I guess I don’t know what you mean, can you expand on that?

Spencer White: 17:19 Yeah just like you know when an institution is going into the market looking to acquire a company, or when they are in talks with a startup looking to buy. What are some common misconceptions you see on that side of the table?

Max: 17:34 Oh. Well one of the biggest ones we’re seeing nowadays are maybe a cause and effect of the VC market over the last couple of years where there’s been so much money poured into, especially certain divisions inside the capital market space, that a lot of misconceptions thinking that the higher valued or some of the companies that have raised significant rounds are the winners in that market. And usually when we’re talking to some of the bigger buyers inside that space they immediately mouth off some sound bite or something that they saw on CB Insights or the like, but just because we’ve known the market so well, we know some of the Tier 2, Tier 3 players inside that space that may have better technology, may have a more experienced management team, may have a better sales pipeline. It’s just a lot of people just don’t know that because they haven’t raised a lot of money, or they haven’t been out there banging their drum on the sales team. So when we talk to some of the bigger buyers out there, they’re very focused on maybe one or two names inside the space, and they’re trying to find out who’s doing what, and when and where and why, and we definitely come to the table and open their eyes to the three or four or five other groups that they just didn’t know where there.

Spencer White: 18:48 Great, great. So let’s look forward. What are your … do you have any predictions on where all these trends we’ve talked about will converge in the next six to 12 months? Where do you see the rest of the year going in the fintech M&A space? Or if you wanna make any sort of Nostradamus predictions.

Max: 19:08 One of the bigger themes that I’ve seen over the last couple of years are the bigger deals. Like EZ got bought today. Charles River got bought last week. Going all the way back to 2015 and 16 you got IDC, [inaudible 00:19:23], just last year was Ipreo, or this year was Ipreo, and Dealogic, there’s just been some massive massive deals inside this space.

Max: 19:30 So two things I’m probably gonna see over the next six months to maybe a year. One is I think some of the bigger acquisitions are gonna start shedding divisions. So you’re gonna see a lot of divestitures, or the like, where maybe ICE doesn’t need a certain division of IDC and they finally realized over the last couple of years that it’s just something that they need to get rid of, and I think that there’s a huge amount of dry powder in the private equity sector that are just waiting on the sidelines to dig into stuff like that. And that’s my second theme, where a lot of these deals I think are gonna be in the lower end of the middle market, probably deal-flow or transaction size under half a billion, maybe under 750. And I think that there is so many overlooked businesses inside that space that there is a little bit of a feeding frenzy for good companies when they do come to market. So I suspect deal-flow will increase over the next six to nine months.

Spencer White: 20:33 Got it. Is there a particular sector or technology that is most ripe for an acquisition or merger?

Max: 20:41 I’ll give you three. I think capital markets, I think bank technology, and I think GRC are probably gonna be the biggest three. More so than insurtech. I think that insurtech’s still going through its investment stage, probably for another six to nine months, and you haven’t seen, nor have I heard many kind of big insurtech M&A rumors or ideas poppin’ around.

Spencer White: 21:04 Just for the laypeople listening, what’s GRC?

Max: 21:09 Governance, risk, and compliance.

Spencer White: 21:11 Got it.

Max: 21:12 So any financial service firms out there that’s gotta deal with any type of regulation coming down the pipe, or the like. Or compliance internally whether it be voice recording, or trading surveillance.

Spencer White: 21:24 Got it, got it. Alright, Spence you got anything else? That was all the questions I had written, I think we had some great content here.

Spencer Israel: 21:32 You took all my questions man. So I don’t really got anything. I guess, you know what, let’s wrap with this. I mean I try to ask people whenever I chat with them is what … in terms of your job, what keeps you up at night?

Max: 21:48 My biggest one is did I do enough for my client? That’s the one. I can’t go into, in-depth on that because it’s 15 different variations in the back of my head on what that means.

Spencer Israel: 22:01 Still a good answer.

Spencer White: 22:02 Yeah still good.

Spencer Israel: 22:03 Still a good answer.

Spencer White: 22:03 Still good. Well we can chop that up, sweet. Alright, Max, thanks for this, shout out to you for setting this up I think this was awesome, and yeah I’m really happy with the way this turned out.

Max: 22:14 Thanks guys.

Spencer White: 22:15 Awesome. Thanks everybody.

Max: 22:16 Take care.

Spencer Israel: 22:20 Alright so that was our chat with Michael Maxworthy, AKA Max, from Marlin & Associates. White, what did you learn there?

Spencer White: 22:28 I thought it was, not quite weird, but maybe somewhat remarkable that we just spent a lot of time talking about RIA’s, and how that is like actually a really hot fintech space. But I think what it keyed on was this larger trend that young folks who might’ve gotten hooked on finance or fintech, whatever, with opening … using Robinhood, or opening an Acorns account or whatever, they are either aging now, or will soon age into a bracket where they need more sophisticated financial products. It was interesting that what a very sort of Silicon Valley approach to fintech like Acorns … rather than build it themselves like Robinhood and Clearing, they just decided to buy. It was interesting that there have been multiple RIA acquisitions in that space. So it’s just interesting to see how M&A plays into fintech growing up.

Spencer Israel: 23:24 And you know we both have interviewed Max several times over the course of the last few years, he’s been-

Spencer White: 23:31 a big part of the BZ Awards for a long time.

Spencer Israel: 23:34 Right, right. It’s always interesting when, ’cause I haven’t spoken to him in a year or so, to see how … ’cause in my view, I don’t wanna speak to many M&A, fintech experts, so he kinda represents my window into that world, and it’s interesting to watch how that changes or evolves over time. ‘Cause a couple years ago, the M&A market in fintech was way different than it is now.

Spencer White: 24:01 Oh yeah, totally. And I mean in terms of fintech exits there people were looking at the public markets. A couple years ago you had OnDeck, and LendingClub, and those were the darlings. Even still today people sort of use those as the bellwethers for the industry, but if … for pure [inaudible 00:24:18] fintechs a company like Acorns or Robinhood is probably more accurate in terms of trends, if you’re following things in terms of trends. So, those were my takeaways, I thought it was interesting and I’m excited to see how these sort of predictions play out over the next year or so.

Spencer Israel: 24:38 Alright. If you liked this podcast, please subscribe. Pretty much wherever it is you get your podcasts. We’re on iTunes, Spotify, Stitcher, TuneIn Radio Public, Audioboom, and more places. Don’t forgot to send a review, or like us, or subscribe. You can also click on the link in the description to subscribe to the Fintech Focus newsletter, that Spencer himself writes every Friday. Thanks again to WeWork for letting us use their podcast studio here in downtown Detroit, and we’ll see you next time on the Fintech Focus podcast.