The mega fintech acquisitions continue.
Intuit will pay about $7.1 billion, about half in cash and half in stock to acquire Credit Karma, with the deal expected to close in the second half of 2020, the companies announced Monday.
While the plan is to keep the two companies separate and have Credit Karma CEO Kenneth Lin continue to lead his organization, the combined duo are betting that the treasure trove of consumer financial data—now including some 106 million Credit Karma members and 40 million Intuit TurboTax users— will better pinpoint what financial products to recommend to consumers, help them save money, and calculate their taxes.
“We bring together scale and a capability—it’s scale of customers and scale of customers’ data,” said Intuit CEO Sasan Goodarzi during the company’s earnings call Monday. Additionally, the deal is emblematic of another 2020 trend: more companies may be finding being acquired is preferable to pursuing a costly IPO in an uncertain environment.
Currently, Credit Karma offers recommendations on credit cards, mortgages, home loans and more. But during the call, Goodarzi also pointed to the possibility of expanding the marketplace to include other products such as insurance or early access to paychecks—creating a one-stop shop.
Credit Karma’s investors include Silver Lake, which poured $500 million into the company in 2018, representing a valuation of $4 billion. Other investors include QED Investors, Ribbit Capital, and Susquehanna Growth Equity.
For Intuit, the acquisition also comes at a time when the proliferation of free tax filing products are increasingly posing a threat to the company’s current model. The Internal Revenue Service had considered creating its own free tax program in years past, but instead reached an agreement with tax prep companies: private sector firms such as Intuit would create their own and offer the service free to those under a certain income threshold (some 104 million tax payers are eligible for the offering). Still, much of Intuit’s revenue comes from consumers using its paid federal and state tax filing programs such as TurboTax.
In contrast, Credit Karma gets its foot in the door by offering consumers’ credit scores for free. It makes money by using that data to recommend specific credit cards or car loans, and taking a fee from banks and lenders when a customer buys a product through Credit Karma.
With the Credit Karma acquisition, Intuit is expanding beyond its tax prep software business, and toward a model that effectively makes money by advertising financial products.
“A multi-billion dollar investment to accelerate the transition away from core subscriptions (paying a fee for federal and state filings) toward alternative monetization strategies like origination fees may indicate the shift is happening at a higher pace than initially expected,” the Morgan Stanley analysts wrote.
Credit Karma has also increasingly inched onto Intuit’s territory. In 2016 for instance, the company launched free tax-preparation services.
The big question, according to analysts, is can Intuit execute? The software maker has a “mixed track record with past M&A,” a team of Jefferies analysts led by Brent Thill wrote in a Monday note.
While a 1993 merger with Chipsoft, which put its Turbotax offering front-and-center, has been considered a success, some more recent deals have fallen short of expectations.
One example: in 2007 Intuit purchased banking software Digital Insight for $1.35 billion. Roughly six years later, Intuit sold the company for $1 billion to Thoma Bravo. Months after that, Thoma Bravo would resell the product to NCR for $1.65 billion.
In 2009, Intuit acquired money management platform Mint, for $170 million. Roughly a decade later, Mint’s founder (a former employee of Intuit) is publicly decrying the lack of progress on the product—and it shows in the numbers: Mint currently has about 13 million registered users—down from an estimate of 20 million in 2015 and 2016, according to blog posts.
In the Monday earnings call, Intuit CEO Goodarzi spun the company’s past failures as learnings opportunities.
“We’ve studied our history and learned what works and what doesn’t work,” he said. “What’s most important is Ken is in charge.”
For Intuit, the stakes are high. The Credit Karma acquisition is the company’s biggest ever, and its first under major acquisition under Goodarzi, who joined roughly a year ago.
Fintech exits
Credit Karma’s acquisition also comes on the heels of several other other tie-ups in the finance space. Visa acquired Plaid in January while Morgan Stanley acquired E*Trade earlier this month.
Indeed, M&A becomes more attractive as the appetite for IPOs has cooled. “Potential IPO candidates have watched these technology companies go to market and few have done well,” said Bradley Leimer, co-founder of Unconventional Ventures and an advisor to fintech startups. “Those considering an exit may look at what is happening now and say ‘it’s not a good market’ and are going to have to take a good deal.”
Credit Karma, which grew revenue by 20% to an unaudited figure of about $1 billion in 2019, was previously expected to IPO.
Even beyond fintech, startups are aiming at acquisitions above other types of exits. According to Silicon Valley Bank’s 2020 Startup Outlook, 58% of U.S. startups said that’s the end game.
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