U.S. Financial Services M&A Activity Likely to Increase in 2012 as Markets Improve, Sales by European Banks Accelerate, says PwC US

NEW YORK, March 29, 2012 /PRNewswire/ -- Mergers and acquisitions in the U.S. financial services industry could increase in both number and value of deals, if markets improve and European banks sell noncore business units, PwC said today in a new report. M&A prospects remain uncertain, however, after deal volume fell in 2011 due to the European debt crisis, volatile stock and bond markets, uncertainty around government regulations and a pullback in financing, according to PwC's report, "Balancing uncertainty and opportunity: 2012 US Financial Services Insights" (www.pwc.com/us/fsdeals2012).

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U.S. banking, insurance, asset management and other financial service companies announced 756 deals last year. The figure represents a 10 percent drop from 840 announced deals in 2010 and a 28 percent drop from the five-year peak of 1,048 in 2007. Yet, divestitures by European financial institutions could stimulate M&A in the United States this year as well-capitalized corporate buyers and financial investors are positioned to take advantage of these divestitures.

"Many European banks are seeking to sell U.S. business operations to meet stricter capital requirements at home, and that has the potential to drive a lot of deal making," said John Marra, transaction services – financial services leader, PwC US. "But the willingness to sell must be matched by the readiness to buy. And the successful completion of these deals depends, in large part, on perceptions of stability in the financial markets."

The report shows:

• The value of U.S. financial services deals increased 40 percent last year to $71.2 billion from $50.9 billion. The increase was largely attributable to a single transaction -- the $32.7 billion purchase of HSBC Holdings Plc's U.S. card and retail services business by Capital One Financial Corp. There were 10 deals with an announced value of more than $1 billion, compared with 13 in 2010, eight in 2009 and 25 in 2008.
• Market volatility, which kept many deals from being completed in the second half of last year, could also harm deal making through the rest of 2012. Uncertainty about the financial impact of regulatory reform, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, could also affect the ability to reach agreements.
• Potential buyers and sellers continue to engage in a significant amount of pre-deal activity. However, a high proportion of possible deals don't get past the negotiation stage because of a fundamental mismatch – buyers worry about overpaying and are less optimistic about profitability than would-be sellers.

"Companies that hope to make a sale must bring to market a definable business with the ability to generate growth – including assets, systems, customer relationships, employees and technology.  That is attractive in today's market," Marra said. "The buyers who can close deals will be diligent about capital levels and develop relationships with regulators."

Banking: Obstacles, But Causes for Optimism

• Announced deals in the banking sector fell 24 percent to 248 in 2011 from 325 in 2010. The value of those announced deals rose 40 percent to $16.9 billion from $12.1 billion.
• Fewer banks failed in 2011, and, as a result, the pace of sales facilitated by the Federal Deposit Insurance Corporation slowed. FDIC-assisted sales dipped to 90 in 2011, compared with 157 in 2010 and 140 in 2009. The slide will likely continue in 2012, as the FDIC's list of problem institutions shrinks.
• Regulatory uncertainty, including the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States, has created hurdles for M&A activity. Meanwhile, as the European Commission requires banks to recapitalize, many could seek to sell noncore businesses abroad.
• Improved bank earnings could spur M&A activity in the sector as investor confidence strengthens.
• The Federal Reserve's recent stress tests of the nation's banks found that 15 of the 19 largest banks would maintain sufficient capital even during a deep recession with 13 percent unemployment and a 50 percent drop in stock prices. These findings, along with strong recent financial results, provide more certainty to the banking sector and could boost M&A opportunities.

Insurance: Excess Capital, Lower Rates Could Spur M&A

• M&A activity in the insurance sector was relatively flat in 2011, with announced deals reaching 310 compared to 304 a year earlier. Announced deal value increased 43 percent to $12.9 billion from $9 billion in 2010. 
• U.S. insurance companies appear to have recovered from the financial crisis more quickly than banks. After using some excess capital for dividends and share buybacks, they could face pressure to deliver earnings growth and instead, use this capital for acquisitions.
• Low interest rates will likely remain in effect, which reduces the profitability of insurers and may lead some companies to exit certain businesses. However, valuation gaps may constrain the number of willing sellers in the market.
• Lack of clarity on federal regulation and legislation – including healthcare reform and the potential of new oversight of the Federal Insurance Office – will continue to play a role in hesitancy towards M&A.

Asset Management: European Banks Divestitures Create Potential Big Deals

• The asset management sector saw an increase in announced deals – from 86 in 2010 to 99 in 2011. However, total disclosed deal value dropped 33 percent to $3.3 billion.
• Demands on European banks could create the opportunity for landmark acquisitions. Banks looking to shore up capital ratios and prepare for write downs associated with the continent's debt crisis are likely to sell asset management businesses where there is significant interest.
• Significant market losses and increased volatility in the third quarter of 2011 led many potential buyers and sellers to walk away from the M&A table. Deals involving small and medium-size companies won't return to their historic levels until markets strengthen and regulatory and political issues are resolved.
• Pure-play asset managers and private equity firms are likely to be the main buyers as well as global financial services firms from countries who were less impacted by the financial crisis.

Other financial services companies: More spinoffs by large companies

• The number of announced transactions involving broker/dealer firms, credit card companies, investment banks and other financial institutions decreased by 18 percent from 120 in 2010 to 99 in 2011. The value of those deals more than doubled to $39 billion in 2011 from $14.6 billion in 2010, almost all from the HSBC-Capital One agreement. 
• Large financial services firms will continue to spin off units to bolster capital levels, attracting corporate and private equity buyers with available cash on their balance sheets.
• Stock exchanges are expected to continue to pursue consolidation opportunities in 2012 in order to gain market share, reach cost synergies and expand product offerings and geographic footprint.
• The Dodd-Frank Wall Street Reform and Consumer Protection Act, which has yet to be fully implemented, could require the sale of certain lines of business.

"There are signs that we could have an uptick in M&A activity, bringing it back to normal historical levels," PwC's Marra said. "It's worth noting, however, that many of the same factors that have limited M&A, such as market uncertainty and regulation, have not disappeared and could still affect the ability of buyers and sellers to complete transactions."

The report, "Balancing uncertainty and opportunity: 2012 U.S. Financial Services M&A Insights," is PwC's U.S. transaction services practice fifth annual M&A analysis and outlook for the financial services sector.  To obtain a copy please visit www.pwc.com/us/fsdeals2012. To find out more about how PwC can help navigate regulatory complexity, visit www.pwcregulatory.com.

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SOURCE PwC US