Dealmakers see uptick in financial services M&A, but expect few large deals
Financial services M&A is likely to increase in the second half of this year, but few large mergers are expected, dealmakers said.
Bank deal making will stay active as deal valuations have improved and acquirers’ stocks have gained. Regulatory costs are also putting pressure on smaller banks to look for partners, said Thomas Hayes, a director at DA Davidson & Co. Loan growth is still slow, leading many banks to prefer to grow through M&A, he said.
There were 136 bank deals in 1H14, compared to 115 in 1H13. Deal volume was the highest since 1998 and deal multiples were also up, according to a Raymond James report, from an average of 1.19x book value in 4Q13 to 1.49x in 2Q14.
The largest banks have not been active buyers, although some have sold units or purchased non-bank businesses, said Ralph “Chip” MacDonald, a partner at Jones Day. The deal climate is not expected to get better for large banks, as regulators perceive banking as too concentrated, he said.
70% of deals were for banks with less than USD 400m in assets, while close to 90% of deals were for banks with less than USD 1bn in assets, said Wesley Brown, managing director for KPMG Corporate Finance.
Advisors to regional banks said they are seeing limited activity among larger institutions, though there have been murmurs of conversations. If the long-delayed merger of M&T Bank and Hudson City Bancorp closes and banks cleared by regulators to make acquisitions find targets, deal activity may resume, one said.
There is pent-up demand for deals, as banks that would otherwise have sold stayed on the sidelines from 2009 through 2011, Brown said. Still, deal activity, while now solid, has not exploded. More banks in rural areas are looking to sell, but acquirers prefer higher-growth urban markets, creating something of a mismatch, Brown said.
Banks also have less leverage available to them for deals as trust preferred is no longer available and perpetual preferred stock is difficult to issue for buyers with less than USD 5bn in assets. Regulators are also increasingly cautious about bank rollups, preferring that acquirers take time to digest purchases before returning to dealmaking, Brown said.
“There are many good deals that are not getting done,” said Jeremy Josse, managing director for KPMG Corporate Finance, noting that regulators are exercising caution, adding additional complexity to the deal process. “The market has one foot on the accelerator and one foot on the break,” he said.
The tough regulatory climate, combined with more all-stock deals, means sellers have to put in their time in due diligence, just as buyers do, MacDonald said. They need to ensure that the acquirer has good relations with regulators and have stock currency that’s valuable in the long term, he said.
Antitrust concerns are growing for regulators looking at bank deals in urban areas, because there are few banks building branches and even fewer new charters. There is a first mover advantage for buyers in these markets, as faster-moving banks can potentially box out peers, MacDonald said.
Insurance M&A had been sluggish, but some insurers are selling underperforming units, as they evaluate the fitness of their portfolios. International M&A could be a bright spot, with Japanese firms looking at the US for growth, highlighted by the USD 5.75bn deal announced in June by Japan-based Dai-ichi Life for Alabama-based Protective Life.
The insurance sector will see more M&A over the next six months, an industry banker said. Private equity and insurance companies are holding large amounts of capital they need to deploy, he said. Workers' compensation insurers as well as medical stop loss businesses will see increased activity as insurers show heightened interest in these segments, the banker said.
Asset management M&A is increasing and is ripe for more consolidation. There are too many funds with less than USD 2bn in assets. Some are struggling with returns and will face difficulty raising fresh funds. These issues, combined with stricter regulations, will spark more deals, Josse said.
The financial technology space will see a number of deals in 2H14, a payments industry consultant said. Several segments of financial technology, including point-of-sale, mobile payments, and loyalty, will see consolidation, the consultant said.
Earlier this year, fast growing payments firm Mercury Payments Solutions sold to Vantiv (NYSE:VNTV) for USD 1.65bn, setting a potential benchmark for the sector. Many traditional payments firms, though, are seeing limited growth and may not fetch as high prices.