M&A activity: How will Covid-19 change things?

Paul Groarke our consultant managing the role
Posting date: 05 May 2020

Merger and acqusition (M&A) consolidation has been a buzzword across financial services (FS) for several years now. Many of us were therefore primed and ready for a flurry of deals in 2020 - but then Covid-19 happened.

Some long discussed deals became a reality, with banks consolidating primarily on either a regional or domestic level which did create relatively high levels of activity across the Nordic and CEE countries. While the number of global announced transactions in 2019 fell 3.7% from 2018 levels, the past five years have all enjoyed relatively high levels of activity, with global M&A volume surpassing $3trn each year since 2014.

In relation to the asset and wealth management sector, the value of M&A fell sharply last year with a record number of smaller deals accounting for the bulk of consolidation activity. Announced M&A deals involving asset and wealth managers fell by half to $13.5bn, according to Piper Sandler, the New York-based investment bank. Just two deals last year involved price tags of more than $1bn: Brookfield Asset Management’s purchase of a majority stake in Oaktree Capital for $4.7bn ranked as 2019’s biggest deal; and Charles Schwab’s acquisition of USAA Investment Management for $1.8bn was the other. With M&A activity dominated by smaller deals, the assets moving between managers dropped by two-thirds to $1.3tn last year, the lowest since 2010.

That said, 2020 started on a promising note. The $4.5bn acquisition of Legg Mason by Franklin Templeton that was announced in February creates a $1.5trn money manager. It comes at a time of continued outflows for Franklin and brings together businesses that between them run strategies across equity, fixed income and alternatives; as well as institutional, retail and high-net-worth clients. The transaction will also see Franklin take on $2bn of Legg Mason's outstanding debt.

TA Associates, the Boston-based private equity manager that played a central role in the recent agreed takeover of Merian Global Investors by UK rival Jupiter, has also been active in the US wealth management sector. TA Associates bought a majority stake last year in Wealth Enhancement Group, who have made 13 acquisitions of smaller wealth managers themselves.

From a more granular UK asset management perspective; in 2019 there were 121 UK asset management firms taking part in “small” M&A deals amounting to a total value of £6.8bn, which was up from 125 deals with a value of £3.8bn in 2018.

Opportunities presented by M&A activity

Consolidation within FS has many positive outcomes. The first and most obvious is cost synergy and streamlining and removing costs from duplicate functions. Revenue synergies can occur as well, with the ability to cross sell new services to new markets and customers. With complementary strengths brought together by consolidation and M&A activity, organisations can see scale and brand differentiation, with new growth targets and ultimately higher stakeholder returns.

An example of the benefits of consolidation can be seen by the acquisition of First Data by Fiserv, the global provider of financial services technology. This deal allowed two major organisations to combine their capabilities to produce a new end-to-end payments platform. Fiserv announced nearly $3.7 bn in internal revenue in Q4 of 2019, which was 5% YoY growth, of which First Data contributed 61%. The two companies have found revenue synergy opportunities by combining  offerings, processing capabilities and existing relationships to attract and cross-sell to clients. In return, clients and customers can enjoy a more streamlined offering with even more relevant service lines.

The impact of Covid-19

Dealogic data suggests that the value of first quarter M&A activity in 2020 was significantly lower than that of the last quarter of 2019, with companies now facing a tumultuous stock market, a lack of debt financing and a dramatically recalibrated business networking landscape, all of which is impacting the ability to complete M&A transactions. The industry is seeing processes slow down or be put on hold, with some deals being pulled entirely. Companies are instead turning their attention to the economic resilience of their own operations as well as the wellbeing of their staff.

Where the market will land once Covid-19 blows over is uncertain. It might be that the impact on M&A and capital raising is simply one of delayed activity, where deals that may have otherwise taken place in H1 are pushed back to later in the year. There may also be a surge in distressed M&A activity as companies look for bailouts or go bust. But while the market is slow currently, it’s not entirely stagnant. Companies have announced $67.5 bn in mergers, acquisitions and investments since the pandemic was announcement in mid-March, although this is less than half the amount during the same period in 2018. Of this activity, private equity has proven to be very busy with the likes of KRR & Co’s deal for Viridor Ltd being settled much more quickly than usual, showing there are always some pockets of the market that thrive in times like these.

Keep informed of the latest financial services news

While market conditions may be tougher, M&A activity continues in financial services. For the latest news on this or any of Hanover’s other sectors, stay tuned to our insights hub.

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