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PricewaterhouseCoopers: M&A Activity in US Financial Services Sector to Gain Momentum in 2010

Source: PricewaterhouseCoopers

Posted on 16 Apr 2010

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Merger and acquisition activity in the US financial services sector will gain momentum in 2010 as industry conditions continue to improve and the outlook for regulatory reform gains clarity, according to a PricewaterhouseCoopers' 2010 Financial Services M&A Outlook published today.

According to the publication titled, On the Road Again – Transactions in an Opportunistic Market, deal-making in the remainder of 2010 will be marked by a steady stream of FDIC-assisted M&A deals in the banking sector, continued consolidation among small- to mid-size asset management firms, and an uptick of deals in the property and casualty (P&C) insurance segment. Although year-to-date transaction volume has been modest, PricewaterhouseCoopers expects activity to increase over the remainder of 2010. Improving sector fundamentals will reduce the gap between buyer-seller pricing expectations and uncertainty surrounding regulatory reform is likely to be clear. These factors will enable the potential impact of prospective reforms to be priced into term sheets.

“We believe the current market presents a significant number of potential opportunities in the banking, asset management and insurance sectors for investors that have the liquidity and capital strength to be acquisitive and the infrastructure and capabilities to realize potential synergies,” said Gary Tillett, financial services leader, transaction services, PricewaterhouseCoopers.

“Those who think creatively, understand sellers’ needs and form relationships to identify unique opportunities early on will be strategically positioned to take advantage of the dislocation in the markets” said John Marra, insurance M&A leader, transaction services, PricewaterhouseCoopers.

The report outlines a number of key considerations that will influence M&A activity in 2010, grouped by sector:

Banking outlook

FDIC-assisted sales of failed banks kept the US financial services M&A market buoyant in 2009. These deals will continue to present “once-in-a-lifetime” opportunities over the coming year for investors seeking to acquire distressed banks with limited downside investment risk. Banks with healthier balance sheets and stronger capital levels will be best positioned to take advantage of the current market conditions. Loss-sharing agreements provided by the FDIC will continue to attract strategic and financial investors to the deal table, particularly among small- to medium-sized banks. As of December 31, 2009, the FDIC’s problem-bank watch list included more than 700 institutions, which PricewaterhouseCoopers believes will continue to fuel the increase in the number of FDIC-assisted M&A deals in 2010.

PricewaterhouseCoopers expects to see greater levels of collaboration between private equity investors and “good” banks to capitalize on potential opportunities in the remainder of 2010. Private equity firms with banking expertise will be well positioned to anticipate the impact of the significant regulatory, integration, compliance and accounting requirements associated with failed bank transactions.

“Regardless of the sector, size or type of deal, the complexities found within M&A transactions can be significant, and buyers should not rush into a deal without considering the current and prospective tax and accounting rules as well as the operational, technology and credit management implications surrounding the FDIC loss share agreements" said Rick Bennett, partner, banking and capital markets, PricewaterhouseCoopers.

Asset management outlook

PricewaterhouseCoopers believes the trend of divestitures of asset management businesses by banks and insurance companies will continue into 2010. In addition, we expect an increase in consolidation among independent, small- to mid-sized asset managers in both traditional and alternative asset management sectors of the market, which have been waiting for valuations to improve.

Several other factors that may affect asset management M&A activity include: proposed congressional legislation that would potentially subject alternative fund managers to additional regulatory scrutiny; rigorous enforcement of tax rules; proposed legislation ending favorable capital gains treatment; increased pressure to reduce fund expenses; a push towards performance fees vs. management fees in the alternative space; and investors’ flight to quality and scale.

Insurance outlook

PricewaterhouseCoopers believes that deal activity in the US insurance sector is likely to remain muted overall, given the unknown impact of proposed regulatory reform, fewer distressed sellers in the marketplace, and an industry disposition toward rebuilding balance sheets over M&A. However, struggling life insurers looking to raise capital through the sale of non-core businesses and continued soft product pricing in the P&C sector are prompting consolidation.