Bank M&A: small is beautiful
Deals should be small and focused, rather than ‘transformational’
This year’s bonus letters have barely been printed, but merger and acquisition bankers will already be thinking about next year’s payouts. And where better to start than their own sector? Pickings have been thin in recent years. In 2007, there were more than 1,000 deals in the global banking sector worth a total of over $443bn, says Dealogic. In 2014, the deal value shrunk to less than $120bn. Europe has been particularly slow — in 2007 it accounted for more than 60 per cent of deals by value. This year that proportion has fallen to just 31 per cent.
But the M&A bankers might do well to target Europe as they set their strategies for 2015. The eurozone’s banks now have a common regulator, the European Central Bank. That, combined with the balance sheet review and stress tests completed in October, make the regulatory backdrop firmer. And the banks need to improve their returns — Morgan Stanley expects Europe’s banking sector to make a return on tangible equity of just 10.5 per cent in 2015. There’s no revenue growth to push that up, so any improvement will have to come from lower costs. Dealmaking is one way to achieve that.
All set for a bumper year of deals then? Don’t bank on it. Cross border M&A is likely to be thin. The shadows cast by failed deals from the boom years (ABN Amro, anyone?) are long. Pity the chief executive who tries to pitch a “transformational” deal to investors who have just finished recapitalising their bank. Spain’s Santander, traditionally active in M&A, was quick to squash rumours in November that it might be interested in troubled Italian lender Monte dei Paschi di Siena.
There will be pockets of dealmaking though. In-country consolidation will be one source. It is a must in Italy, and is also possible among the smaller German banks. There may also be more deals in Spain, where last year Caixabank bought much of Barclays’ local business for €800m. And the UK’s challenger banks need scale if they are going to take on the big boys.
Elsewhere, expect infill deals as banks add skills. This month Spain’s BBVA bought Madiva Soluciones, a “big data” specialist. Focused, small deals of this sort, which add capital light businesses or specific skills, should please shareholders, even if they won’t have advisers reaching for the champagne next December.