There continues to be longstanding speculation in the market about when a next big round of consolidation in the banking sector might occur. Will it be 2023? That seems unlikely, particularly “mergers of equals”, for a variety of reasons. However, in a rising interest rate environment there remain grounds to expect an active year for many banking groups on the M&A front. Below are five key themes that might drive that activity.
Continued focus on realigning to core business structures
Banks will continue to look at carve out activity for high cost, low margin businesses in jurisdictions where their group is not close enough to the leading competitive set of banks in a given business or product line. The structure of any such carve outs, however, will be informed by local regulatory restrictions, tax and employment laws. Deals focused on particular business or product lines are likely to tend more towards conversion target pricing than locked box or completion valuations.
Secondary sellers from previous cycle of banking exits
Many larger banking groups implemented a number of country exits in the years following the global financial crisis. Some of those buyers (outside of the local bank buyers that took advantage) are now looking to realise a gain on their, potentially relatively low, investment cost from the original deal.
A number of the original sales, particularly to smaller consortium investors or involving a significant retail element, faced extended regulatory approval processes with local banking regulators. It will be interesting to see how those same banking regulators approach business plans from a new acquirer community, and whether discretionary capital add-ons are deployed as a regulatory tool that could negatively impact realisation value or even execution certainty.
Private banking and wealth management
Notwithstanding the difficulties that a number of wealth management providers encountered in 2022, those same market conditions may convince once reluctant sellers to give way to larger bank players that can absorb the ever increasing compliance costs and that will leverage their existing technology platforms to facilitate the digitalization agenda that many existing smaller private bank players have been unable to bring to fruition with their current set up. That said, market conditions may not be sufficient to fully address the value expectation gap that has plagued a number of deals in this sector over the years, particularly when combined with the enhanced due diligence that has become a feature of this part of the industry for bank buyers.
Acquisitions in the pursuit of digitalization
Digitalization across the banking sector continues apace. Whilst many banks have in-house initiatives and business units dedicated to this area, we expect opportunities for inorganic growth through acquisitions that are accretive to banks’ digital offerings and their broad digitalization strategies (whether that be business-to-consumer or business-to-business targets) will remain on the table throughout 2023.
A constrained financing and funding landscape across FinTech following a turbulent 2022, coupled with weakness in sterling relative to the US dollar is likely to depress valuations across the sector, potentially presenting additional value for banks seeking transformative opportunities at a discount.
Strategic investments playing offence and defence
In the past few years, banks have been making significant numbers of strategic direct investments across the financial services and technology landscapes. These investments are characterised by various factors, including alignment with high growth prospects and/or targets that may support bank service offerings, access to talent, insight on market developments and the possibility for further investment as the targets scale.
These stables of direct investments represent both an offensive and a defensive play, ensuring that banks have access to opportunities, talent, technology and insights to enhance their own service offerings and to protect against the challenge provided by their core competitors, as well as challengers and mobile-only providers.
We expect the drivers of this activity to remain relevant as we move through 2023, with banks continuing to enhance their stable of direct investments.
M&A trends in the life sciences and healthcare sector
Due to the multiple ongoing crises we are currently dealing with, stakeholders and key decision makers operate in an environment characterised by volatility, uncertainty, complexity, and ambiguity. If met with resilience these quite difficult times still provide chances and opportunities though.
Navigating distressed M&A
Investors and advisers have been poised for a flood of distressed M&A transactions since the early days of the pandemic.
Bridging the valuation gap in times of uncertainty
Rising interest rates, long-lasting inflation, supply chain uncertainty, regulatory changes, pressure for business transformation, geopolitical instability, economists predicting a global recession – dealmakers are increasingly confronted with extremely challenging conditions that affect their M&A-roadmaps.
M&A trends in Asia: The outlook for 2023
Asia has not been immune from the global macroeconomic headwinds that have built steadily over the course of 2022, and is now also experiencing rising inflation and interest rates and tightening monetary policy, albeit perhaps not to the level seen in the West.
Tech M&A: A return to pre-pandemic levels?
Following a surge in M&A activity in 2021 and the first quarter of 2022, deal making in the Tech sector slowed significantly through the remainder of 2022.
ESG in Canadian M&A and Shareholder Activism: Perspectives for 2023
Despite somewhat shaky economic conditions and geopolitical upheaval on the world stage, M&A activity in Canada was relatively steady in 2022.
European Private Equity: A broadly positive outlook despite economic headwinds
After a record-breaking year in 2021, 2022 demonstrated that the years of predictable growth in the private equity industry have, at least temporarily, come to an end.
M&A in the Middle East builds on active 2022
Proving its resilience and ability to weather political headwinds, the Middle East region saw a particularly active year for M&A during 2022, with several deal-makers citing pre-pandemic levels of activity.
Merger control in Europe: Will the increased scrutiny of deals impact M&A in the year ahead?
2022 saw the rhetoric about “killer acquisitions” made concrete. Both the European Commission (EC) and German Federal Cartel Office (FCO) fought to defend their ability to review acquisitions of entities with limited EU presence, revenue and customers, with the EC’s jurisdiction confirmed by the EU’s General Court (GC), and the FCO losing at first instance.