NEW YORK, Feb. 21, 2013 /PRNewswire/ -- Financial services mergers & acquisitions (M&A) will face both uncertainty and opportunities in 2013 due to several factors including increased regulatory costs, depressed organic growth, and the greater availability of attractive financing, a new report issued by PwC US reveals today. However, while 2012 proved to be a challenging year for announced deal activity in the financial services sector, there is some cause for optimism in 2013.
US banking, insurance, asset management, and other financial services deal activity in 2012 differed very little year over year from 2011. Announced transactions rose from 756 in 2011 to 768 in 2012, but deal value fell from $72.1 billion in 2011 to $62.4 billion in 2012. Deal volume is still down from pre-financial crisis levels.
"The past year has seen a stabilization in many of the challenges facing financial firms after the financial crisis of 2007-2008 such as uncertainty in asset quality and growth prospects, regulatory approvals, and integration of operations, as well as the large number of new regulations coming online," said John Marra, PwC transaction services—financial services leader. "While obstacles remain, we expect these trends to continue to improve in 2013."
According to the report:
- The fourth quarter of 2012 was marked by a significant surge in financial services M&A activity. The pent-up desire for acquisitions that has built up over the past few years, along with concerns about tax increases in 2013, drove M&A activity to a level not seen since Q4 2010.
- 2012 featured the return of private equity (PE) to the financial services M&A sector, a trend that should continue into 2013. PE-backed announced transactions rose 73% from 40 in 2011 to 69 in 2012. Many of these transactions looked to take advantage of divestitures of non-core assets from certain financial institutions.
- Cost pressures due to increased regulation such as Dodd-Frank, FINRA, the Consumer Protection Act, along with discussions around Solvency II could induce a wave of consolidation among small and medium sized organizations. On top of that, the continued low interest rate environment may drive well-capitalized financial services companies to turn to strategic acquisitions in search of yield.
Grounds for 2013 Optimism
"M&A desire remains high among buyers, and 2012 featured a significant amount of pre-deal activity. However, valuation gaps remain, and differences between buyer and seller perception of future profitability will continue to present a challenge," Marra remarked. "At the same time, ongoing divestiture of non-core assets by major European institutions will drive deal activity into 2013."
Banking: Opportunities Amidst Regulatory Uncertainty
- The banking sector represented the second largest sector in 2012 by both announced deals and deal value. While deal volume increased 10%, deal value fell by 20%.
- The number of FDIC assisted transactions fell by 50%. Excluding these, deal volume actually rose by 43% over 2011.
- Activity at large-cap institutions could eventually be driven by the creation of spin-offs of non-core businesses in order to address the shifting regulatory landscape.
- 2013 should feature increased interest in acquiring mortgage servicing rights by PE and other buyers. Reduced uncertainty in the sector thanks to agreement between regulators and a number of mortgage companies should drive activity.
Insurance: Momentum is Building, but Yield Concerns Remain
- Deal volume remained flat from 2011 to 2012, but building momentum in the final quarter of 2012 should continue into 2013. The insurance sector was actually the most active in financial services M&A during 2012.
- Insurance companies will continue to face a strain on profitability due to low interest rates. As a result, companies may pursue strategic acquisitions or exit certain lines of their business.
- Uncertainty around Solvency II and its potential impact on capital requirements for European insurers and reinsurers may lead some companies to exit the U.S. market. This trend influenced a number of companies in 2012, and should continue into 2013.
- Significant disaster related losses in the P&C industry may ultimately lead to market price increases. In turn, this may increase the attractiveness of the industry to potential acquirers.
Asset Management: Strong Performance Signals Recovery
- Deal values in 2012 far exceeded 2011, even after excluding mega deals carried out in both years, and in spite of the fact that deal volume fell 27%. Medium sized disclosed deals increased, signalling recovery in the sector.
- 2013 is expected to feature a moderate resurgence in the number of deals involving small to medium sized independent managers as values improve. Traditionally, these deals have driven volume in the sector.
- Divestiture activities from European and U.S. banks, as well as insurance companies, should continue in response to regulatory pressures. PE interest in the sector has also remained strong.
- In earlier years, many deals were side-lined due to the valuation gap between buyers and sellers. It is unclear if any of these deals will return to the market in the future.
Other Financial Services: Continued Pressures May Signal More Consolidation
- There were 56 broker-dealer transactions in 2012, up from 47 in 2011. Small broker dealers remain vulnerable to consolidation due to increased cost and revenue pressures.
- Competitive pricing, low trading volumes, and historically low interest rates will remain a source of pressure on both revenues and cash spreads for broker-dealers moving into 2013.
- The largest announced deal in the other financial services sub-sector was Intercontinental Exchange's acquisition of NYSE Euronext. Continued global exchange consolidation is expected in 2013.
- Heightened regulatory burdens in the mortgage industry have led a number of participants to exit, leading to an increase in the specialty finance and loan servicing ends. Buyers have looked to expand their product offering and institute economies of scale. The appeal of this industry may only increase as a result of increased profitability due to the Home Affordable Refinance Program (HARP).
"Momentum seems to be building in M&A across a number of different sectors," PwC's Marra added, "However, it is important to remember that ongoing uncertainty could temper growth and recovery."
The report, "A Cause for Optimism, in the Face of Uncertainty: 2013 US Financial Services M&A Insights," is PwC transaction services 6th annual M&A analysis and outlook for the financial services sector. To obtain a copy, please visit http://www.pwc.com/us-financial-services-mergers-acquisitions-2013. To find out more about how PwC can you navigate regulatory complexity, visit www.pwcregulatory.com.
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PwC's Deals practitioners help corporate and private equity executives navigate transactions to increase value and returns. In today's increasingly daunting economic and regulatory environment, experienced M&A specialists assist clients on a range of transactions from smaller and mid-sized deals to the most complex transactions, including domestic and cross-border acquisitions, divestitures and spin-offs, capital events such as IPOs and debt offerings, and bankruptcies and other business reorganizations. We help clients with strategic planning around their growth and investment agendas and then advise on the business-wide risks and value drivers in their transactions for more empowered negotiations, decision making and execution. Clients can then expedite their deals, reduce their risks, capture and deliver value to their stakeholders, and quickly return to business as usual.
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SOURCE PwC US