MortgageTech & Services M&A – A Nod to the Turn

In the past few months, we’ve seen a trickle of M&A activity coming from the mortgage solutions market where mortgage volumes may have hit bottom. During prior cycles, M&A activity often slows into the downturn and then acquisitions begin to pick up before the end-market turns. While deal volumes are less than half of the peak of 2021, we are putting out a positive note on our expectations for 2023 to close modestly higher to pre-peak trendlines with ~75 transactions by year’s end. Notably, we expect an average transaction size of roughly $30M (excluding mega deals), which is about half the historical average deal size for this sector. These smaller transactions fit the risk expectations for the times, and help incumbents consolidate their positions while also making up for lost growth. We highlight the following observations:

• Scale through consolidation: In today’s environment, savvy acquirers seek to gain scale, take out their competition and gain future earning visibility through acquired synergies.
• Innovation bargains: The trend leading buyers – from automation to AI - are actively hunting. As much of the early-stage capital has moved to the sidelines, we expect early-stage pre-cashflow firms will be driven by survival instincts to merge.
• Reshuffling bets: We’ve seen our corporate venture clients reshuffle their investment portfolios, divesting the cash-burning longer runway holdings in favor of positive cash flowing with greater market traction.
• Darwinian outcomes: In the prior era of low-interest rates and rapid growth, we watched iBuyers gain momentum until the abrupt market turn forced fight or flight responses – Opendoor, the largest iBuyer, is driving strong revenue growth and guided towards positive margins in Q3, while Zillow chose to exit its “Offers” business and layoff 2,000 staff.
• Necessity-induced model pivots: Pressures from the severe market conditions are forcing rapid business model adjustments. Zillow (NASDAQ: ZG) for example announced in June of this year it was shuttering its Closing Services for not being “tech-forward/super app” enough, only to then acquire Spruce two months later – terms weren’t disclosed but were likely attractive as Spruce found a great home after attempting to go at it alone. Spruce had raised $110M in multiple funding rounds but was forced to cut its workforce nearly 70% from its peak in 2021.
• Mega deal: The Black Knight/ICE transaction, now expected to close in September, is the largest of any transaction in the sector. Although originally announced in May of 2022 when mortgage volumes were trending down, but not yet bottomed, the regulators forced two fire sale divestitures of both its Empower loan origination and Optimal Blue mortgage analytics divisions. Constellation Software (TORONTO: CSU.TO) acquired both businesses – Optimal Blue for less than half what Black Knight paid in 2020. The divestitures led to a roughly 15% reduction in purchase price – but assuaged the regulators.

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2023 Outlook

For the remainder of the year, we expect to see smaller-sized transactions pick up (still following our predictions from the end of last year). Our sell-side clients in technology, default services, and BPO spaces are seeing a firming of their new business pipelines and are beginning to test the waters with investors/acquirers. However, in a sign of market caution, the Mortgage Bankers Association just withdrew their Tech Conference, given market conditions. In the chart below we capture the MortgageTech and Services M&A trends and our expectations for a modest second half of 2023 as smaller transactions drive an uptick over pre-pandemic levels.

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Sources:

• Mortgage Bankers Association – MBA Mortgage Finance Forecast August 21, 2023
• Opendoor (NASDAQ: OPEN) Q2 2023 Earnings Call, August 3, 2023
• Statista - Mortgage originations on one-to-four family properties in the United States from 1st quarter 2012 to 4th quarter 2022, with a forecast until 2024
• Company reports

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DISCLAIMER This presentation is intended for information and discussion purposes only and does not constitute legal or professional investment advice. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of Harbor View Advisors, LLC (“HVA”). The information in this presentation was compiled from sources believed to be reliable for informational purposes only. HVA does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented.