US financial market M&A saw slow pace as industry took a breath

M&A in the financial industry saw a relatively slow pace in 2018. The banking system in the US focused on smaller deals aimed at auxiliary services and regional expansion. Specialty finance saw a less fragmented market, and relatively stable deal activity, while investment and wealth management saw further but slowed consolidation, following a bumper year in 2017.

The financial system required large scale state intervention to stabilise what was almost a meltdown of trust in the industry in the wake of the financial crisis of 2008. New regulatory oversight, increased buffers, and a more risk averse attitude sought to reduce the chances of a new crisis. In recent years the industry has become more stable, with profitability increasing in many regions globally.

The industry too has faced considerable challenges outside of changes in criteria – with continued stimulus from central banks, low interest rates, digitalisation, and changes in consumer behaviour, as well as shifting regulatory requirements. One means to continue to grow and access new technologies in the new environment, has been through M&A. To better understand the latest moves in the space, Deloitte recently released its ‘2019 Banking and Capital Markets M&A Outlook’ report.

Banking transactions

Much like wider M&A market activity, the boom in deals noted during 2014 and 2015 cooled somewhat in the years that followed, reflecting wider changes in market dynamics as valuations trended upwards and the number of quality targets declined. Overall average deal value ticked up, however, from $107 million in 2014 to $191 million in 2018. Total deal counts however, came in at 258 last year – below the peak in 2014 of 286 deals.

The firm notes that 2018 was slower than was expected given the macroeconomic conditions, which included increased interest rates and the flow-on effect of tax changes in the US. Overall, the firm notes it was a year of small-scale sales and the acquisition of firms that provide auxiliary services to banks, such as recordkeeping, funds administration, and payments processing.

In terms of deal size, 2017 was relatively slow for the main type of transaction (<$500 million), with 192 deals in the category. There were 30 larger deals ($500 million - $1 billion), which is relatively high compared to the previous year. Mega deals ($1-10 billion) were in line with the previous year, at 32.

One area which has seen considerable activity in recent years is smaller community banks. The segment has sought to acquire both technical expertise as well as targets in urban areas within their wider footprint to create synergies. Some of the bigger movers include Heartland Financial USA with eight deals since 2014; Simmons First National Corporation with five; and Independent Bank Group with four.

Specialty finance

The specialty finance market was relatively quiet in 2018, with 73 deals in total – largely limited to one-off deals, with much of the low-hanging fruit in the sector picked off in 2018. Overall deal value climbed somewhat on the year previous to $406 million, although it remains somewhat lower than the most recent peak of $528 noted in 2016 (excluding the massive GE Finance deal in 2015).

The biggest deal recorded was the sale by General Electric of its energy finance project debt business to Starwood Property Trust for $2.1 billion.

Investment and wealth management

The past years were noted for increased market pressures on wealth managers, as consumer interest shifted to passive funds, LPs became more sceptical, and regulators sought to make fees more transparent. One response has been consolidation in recent years, boosting the sector’s M&A activity and values. This year a lack of targets has resulted in a slowdown, with 192 deals down from 252 deals last year.

2018 saw some mega-deal activity, with the $5.7 billion acquisition of Invesco by Oppenheimer Funds; Hellman & Friedman’s purchase of Financial Engines for $3 billion; and Genstar Capital LLC’s acquisition of Cetera Financial Group for $1.5 billion. Overall, the value this year topped $514 million on average, up from last year’s average value of $285 million.