What is, and what could have been.
It was on the 31st of August, 2021, that Prosus – the investment arm of the multinational conglomerate Naspers – formally announced that PayU – a prominent Dutch payment services company owned by Naspers – was going to acquire BillDesk, a distinguished Indian online payment gateway and aggregator, in a blockbuster deal worth $4.7 Billion dollars. At that point in time, what India was witnessing was the possibility of the single biggest M&A deal in the history of its booming FinTech industry. Naturally, it followed that the economic ombudsman-in-chief – the Competition Commission of India – took notice and went ahead with an investigation of the deal to determine whether it would adversely affect the economic equilibrium of the sector and stack the odds overwhelmingly in favour of the merged entity.
Surprisingly – and also indicating the sheer importance of the potential ramification of the deal – the CCI took a year to pronounce their judgement: On the 5th of September this year, the deal was given the go-ahead. PayU and BillDesk had decided upon a long stop date of 30th September for the deal – that is, at the point of the creation of the contract, the latter date was agreed upon as the latest date by which the acquisition must take place. In effect, that meant that the two FinTech giants had 25 days to legalise the acquisition before the agreed-upon contract expires.
And here’s where the blow was dealt – Prosus, on 30th September, officially withdrew from the contract, thus putting an end to the most anticipated collaboration in FinTech in recent times. In its filing outlining why the deal hadn’t gone through, Prosus explained that there were “certain conditions” that were not fulfilled by the long stop date. The filing does not elaborate concretely upon what these conditions are, only that they weren’t satisfied. And the very fact that they hadn’t elaborated their reasons has raised many eyebrows in the industry.
Given how pivotal this arrangement could have been (for better or worse), this pamphlet will attempt to make the reader aware of the significance of the deal and venture a few guesses as to why the acquisition didn’t happen.
The Interested Party
PayU is a complex entity to analyse. Quite simply put, they are a payment services company that offers multiple solutions to its customers. This includes payment gateway solutions including online payment processing, QR and POS solutions, recurring payments services and more.
The complexity is added through its interests in other fintechs and the string of acquisitions it has made in India recently – in 2016, they bought out Citrus Pay, then their rivals in the payments gateway business, for $130 million. PayU also acquired PaySense, a personal loan fintech in 2020. Apart from this, they also have stakes in other companies in the industry such as ZestMoney, LazyPay and DotPe. As such, they have operations in a lot of the sectors in the industry.
BillDesk, like PayU is a payment solutions company offering multiple products. Most importantly, however, it offers payment aggregation, online payment processing and biller network solutions.
BillDesk is the market leader in the online payment aggregator space. According to The Morning Context, it has a share of close to 25-30%. To put its size in scale, it processed payments worth $92 billion in FY21, according to The CapTable. Last year, PayU had a total payment volume of $55 billion. The aggregate TPV of $147 billion post-acquisition would put PayU-BillDesk leagues above their competition.
As for profits and growth, BillDesk is one of the most successful fintechs in India: According to Money Control, in the same financial year, it registered profits to the tune of $37 million – this, over a revenue of about $230 million. In addition to this, BillDesk also has tie-ups with close to 100 billers.
On a call with Money Control reporters, the CEO of PayU India, Anirban Mukherjee suggested that the acquisition would make PayU “one of the leading players in digital payments.” Additionally, it would also help PayU build a “full financial ecosystem” to serve the needs pf their customers and the merchants tied to them. Lizzie Chapman, CEO of ZestMoney also weighed in on the discussion – she maintains that while payment volumes are skyrocketing, revenue-per-transaction is declining over time. Therefore, she says, the payments space is moving towards a “scale game.”
Simply put, the acquisition would have made PayU head and shoulders above their opposition in the payment aggregation and payment processing business. Combined, they process close to 40-50% of online payment transactions in India. To Razorpay, right behind them, has but a share of 20%.
With the aforementioned synergies, one cannot help but appreciate the rationale behind the deal. Managed and integrated well, there is a lot that PayU stands to gain from this acquisition. Then it is not surprising to venture a question – where did it go awry?
The primary bone of contention that delayed the deal was the very thing that PayU needed it to be – it was a huge! It sought to establish a clear leader in the FinTech market – and it is for this reason that the CCI was prompted to look into the matter. It didn’t help that BillDesk also processed transactions by public sector enterprises – the government can hardly be expected not to investigate when the responsibility of handling those high-profile transaction could potentially end up in the hands of a foreign firm.
As mentioned earlier, this investigation by the CCI took a year to come to a close and the two companies only had 25 days to formalize the agreement. However, as The Morning Context notes, the companies had already begun to plan the integration even as the investigation was going on. It must also be noted that there have been instances where the long stop date on contracts have been extended to complete the acquisition. The decision to not go ahead, therefore, may not have been due to a legal technicality – rather, it may signal a willingness to let go of the deal deliberately.
… and Second Guesses
We may only speculate on the reasons, but perhaps the most important was market sentiment and valuation concerns. Because of a dip in global markets in early and mid-2022 with the possibility of an impending recession, the pre-2022 valuation of $4.7 billion may have been a bit too much for PayU to stomach. As Ashwin Manikandan of The Morning Context points out, the “optimism of 2021” in tech evaporated in 2022, especially after the hit that Paytm stocks – the company with one of the most anticipated IPOs in the Indian FinTech space – took over FY21. There have been falls in valuation of major US payments recently. Concerns regarding valuation may have stayed PayU’s hand from investing such a large amount into BillDesk.
Another reason, perhaps, is uncertainty regarding regulation. Recently, the Government of India has implemented a slew of regulations to rein in the FinTech sector which was hitherto largely unregulated. Given that there may be more oversight in the future, PayU may have adopted a wait-and-watch approach to further investments – they also recently dropped interest in a deal to buy stake in ACKO, an insurtech start-up.
So, what could have been? Unprecedented consolidation in the payment processing and aggregating space, for better or worse.
What stopped it? Delays, regulation and a massive drop in sentiment.
It remains to be seen how BillDesk will move forward from here. Currently though, it seems like the company will continue to perform admirably. The co-founders may have lost a good exit opportunity, but given how well the company has been performing, many more should come eventually. Meanwhile, FinTech enthusiasts may need to find another development to keep them in trepidation and, given how well the industry is performing, that too, should come eventually.