- The $5.3 billion acquisition of fintech startup Plaid by Visa was officially called off last week after the Department of Justice (DOJ) sued in November to stop the deal.
- Fintech investors aren't happy with the move, calling it a "paradigm shift" in how regulators behave that could make it difficult for startups to be acquired.
- Still, they believe the failed deal is actually good for Plaid, and say the booming public markets will make 2021 a stellar year for fintech startups, and their investors, looking for an exit.
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For Plaid's investors, the company's scuttled $5.3 billion acquisition by Visa was a blessing in disguise. They predict the financial software company will have a much bigger exit now that it has emerged as one of the winners from the pandemic.
"I think it's a great thing that they're staying private. Everyone knows and believes that their valuation is probably already 2x what Visa was going to pay anyway," said Menlo Ventures partner Matt Murphy, who has no stake.
For comparison, Plaid had an estimated valuation of around $2.65 billion before the Visa deal, according to deals database PitchBook.
But the outcome has other implications that should worry fintech startups, insiders say.
The deal fell apart under pressure from regulators, who refused to approve the acquisition and instead sued to stop it, saying it was anti-competitive. Now, venture capitalists warn that a higher level of scrutiny could dampen merger and acquisition activity, depriving startups of the main alternative to exiting through an initial public offering.
Read more: Plaid pulled the plug on the Visa deal over price, not antitrust concerns
Mark Goldberg, a general partner at Index Ventures and a Plaid investor, said would-be acquirers will now "think twice" about snapping up tech unicorns because of the antitrust lawsuit that eventually killed the Plaid deal.
"Being stuck in regulatory limbo is a distraction that is not without cost," he told Insider.
Amit Jhawar, a fintech investor at Accel, said the lawsuit reflects a "paradigm shift" in how the government applies antitrust law. He said it's taking a more proactive approach. Instead of just trying to stop competitors from consolidating, it's actively preventing an incumbent — Visa — from acquiring a much smaller company — Plaid — that might become a challenger down the road.
The Department of Justice sued to squash the acquisition after learning that Plaid was building a tool intended to directly challenge Visa. It doesn't currently have debit products.
The lawsuit, Jhawar said, will make fintech companies "more cautious" pursuing an exit through a merger or acquisition.
He added that startup boards should seek higher breakup fees (the fees a party pays if it backs out of a deal) to hedge against the risk of a failed acquisition.
While Murphy says Plaid's independence is a boon for the fintech ecosystem, he says that, more often than not, antitrust regulation hurts businesses that need to exit via a merger and acquisition. The process, after all, is lengthy, and can distract startups from continuing to innovate their business and fundraise for more capital.
"Sometimes a company actually wants to, or needs to get acquired. And I don't think the DOJ can necessarily appreciate that," he said. "It can really screw a company over."
Frothy public markets
Still, even if the DOJ's antitrust case poses complications for future fintech acquisitions, most investors don't believe it will pose any serious threats to the fintech startups looking for other exit options.
All of the investors Insider spoke with pointed to the public market's strong appetite for fintech companies.
Last month, fintech company Upstart went public at a valuation of $1.45 billion, with shares soaring 47% on the first day of trading. And SoFi announced plans to go public via a merger with a special purpose acquisition company (SPAC) earlier this month in a deal that would value the company at nearly $9 billion.
Earlier this week, shares of loan financing company Affirm soared in its public debut, giving the company a market cap of over $29 billion at of Friday's market opening.
Read more: Top fintech investors are excited for a big year of hot IPOs after 2020 blew away their expectations with back-to-back funding rounds and multibillion-dollar M&A
"Historically, acquisitions have been an easier path to exit, but given the frothy public markets these days and ease of SPAC'ing, it makes the public markets more attractive," Sheel Mohnot, a general partner at venture firm 500FinTech, told Insider.
"The good news here is that a lot of these companies are going to prove they can go public and probably wouldn't want to be acquired, especially by an older school incumbent company," Murphy said.
He added that the DOJ would likely leave alone other large, fintech acquirers like Stripe and Intuit, because they are perceived as having less market power than traditional payments giants like Visa.
David Tisch, a founder and partner of BoxGroup, an early Plaid investor, told Insider that the industry's headwinds will still make M&As, alongside traditional IPOs, direct listings, and SPACs, attractive exit strategies.
As for the DOJ's antitrust suit, he said: "the government has always been a wildcard. I don't think that is going to change."
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