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Nov 30, 2009

M&A focus: the return of the bank merger

The consolidation of financial services seems likely to grow

The thought of more consolidation in the financial services industry is enough to make you feel a little queasy at the very least. Much of the mess we now find ourselves in is the result of financial M&A going badly wrong. Deals like Lloyds TSB’s acquisition of HBOS and Bank of America’s purchase of Merrill Lynch cost both buyers their solvency and their independence.

The architects of this mess – the likes of Sir Fred Goodwin and Ken Lewis – have either gone or are on their way out. Bank mergers, on the other hand, may be on the way back.

At least, that’s the conclusion of PricewaterhouseCoopers (PwC) in its annual report on the European financial services industry. ‘As we move toward and into 2010, we expect to see an increase in deal activity,’ the report states.

Of course, it won’t be hard to see an increase in banking M&A; deal activity throughout 2009 has been somewhat on the low side. Announced deals for the first half of 2009 totaled €32 bn ($48 bn), which falls to just €19 bn excluding government activity such as the UK government’s recapitalizations of Lloyds Banking Group and Royal Bank of Scotland, according to PwC. By contrast, deals for the whole of 2008 totaled €178 bn (€70 bn excluding government activity).

PwC sees growth of activity in a number of areas, including the UK’s building societies, Nordic banks offloading assets in the Baltic states and eastern Europe, and a shake-out of ownership in central Europe and the Commonwealth of Independent States. Private equity buyers also feature prominently in the study.

Of most interest to the IR community, though, may be predicted changes to Europe’s asset management industry. The sector is still a long way from returning to business as usual, and consolidation is predicted. Such moves will add to the churn in buy-side contacts that has already been experienced since the beginning of the financial crisis.

‘Net outflow of capital and falling asset values have led to unprecedented pressure on revenues and profits,’ notes the PwC report. ‘Even though capital markets began to stabilize over the last few months, many businesses are still in ‘survival’ mode and are examining ways of further reducing costs in the short term.’

As an example, PwC points to Crédit Agricole and Société Générale, which are teaming up to create Europe’s fourth-largest asset manager, with €591 bn in assets. ‘The effect of lower revenues and pressure on profitability levels is leading some financial groups to consider the disposal of non-core businesses or, indeed, their entire asset management business,’ the PwC report observes. ‘Scale can be important, because it spreads costs across a wider base. Larger investment managers continue to view this as a good time to acquire smaller counterparts and are closely monitoring developments in the market.’