During a mentorship session carried out for the fintechs of our community, we talked with Matteo Morselli of Studio Carbonetti about M&A transactions, particularly in the fintech field.
What could be the objectives of an M&A transaction for a startup?
The most frequent objective is one: growth, which means the acquisition of new markets and new customers. Start-ups are in a very delicate phase of their “corporate life”. The founders may have in their hands a disruptive idea, capable of revolutionizing the market, but they need resources to develop it properly and over a reasonable period of time. The banking channel (and, more generally, the “debt” channel, including the one represented by domestic or foreign credit funds) is often inaccessible, because the risks are too high. This is why resources come in the form of equity transactions: often through capital increases subscribed by third parties. Sometimes (particularly in the tech sector) through M&A transactions with earn-out clauses for the founders. All this obviously has a price, which we have summarized in the title of our mentorship: “M&A, control or development?”. Those who decide to open their equity to third parties to promote the development of their start-up must necessarily take into account the fact that, as a physiological downside of the coin, this will affect the control of the company’s business. If the start-up aims at a wide and rapid development, it will need significant capital and investors will want to intervene vigorously in its management. Conversely, less rapid and extended development goals may be fueled by a smaller injection of capital, and thus be accompanied by a lesser transfer (or sharing) of control to investors.
What may be the objectives of an M&A transaction for the investor?
This depends on the type of investor, i.e. whether it is a “strategic” investor/buyer or a “financial” investor. The first one has in fact an interest in investing in a start-up in order to develop and seize the know-how related to the idea, the product and the business generated by the start-up. Let’s think trivially of the hypothesis of a bank financing a start-up dealing in developing applications for payment services. The second one, i.e. the “financial” investor (represented mainly by private equity and venture capital funds) basically wants to return from the investment in line with its remuneration policies; therefore, the structuring of the relevant investment revolves around the so-called exit strategy. This type of investor is very sophisticated: they generally intervene through minority operations (without the founders being able to monetize the sale of the control premium) but they require a series of agreements and related clauses that essentially allow them to intervene in significant terms in the management of the company.
Which of the phases of an M&A transaction is the most delicate?
By all means the due diligence phase, in which the investor takes into account the economic, legal and industrial solidity of the company, at the end of which he is able to adequately price his investment. It is therefore the moment in which it is clearly understood whether the transaction can be done or not. It is therefore decisive for the start-up to present itself at this stage with all documentation and accounts in order, providing the investor with all the information it requires. In this regard, we would like to highlight one aspect: given the sector in which fintech start-ups operate, i.e. an area highly regulated, any type of investment is generally subject to the condition that, following due diligence, the investor has a clear picture of the compliance of the start-up’s with applicable regulations. Investors generally do not compromise on this and it is necessary to be prepared for it.