admin | 05.09.16

Disruption and Evolution: Financial Services M&A Trends to Watch

RISING TIDES: CONTINUED GROWTH IN FINANCIAL SERVICES M&A ACTIVITy
In the years following the financial crisis, the U.S. financial services industry has weathered a myriad of economic and regulatory challenges which negatively impacted performance, constricted liquidity and hampered deal activity. With continued economic improvement, technology enabling differentiation, and strengthening fundamentals across the financial services sector, deal activity has seen a continued upward trajectory through the end of 2015. In fact, financial services M&A activity reached its highest peak in 2015 compared to any point over the last 10 years.

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KEY 2015 M&A TRENDS
There were a total of 1,267 financial services deals in 2015, with an announced deal value of $264 billion. The number of deals with a value over $1 billion (i.e., “mega-deals”) also reached a peak in 2015, with 35 deals representing $233 billion or 88% of total announced deal value.
• Although there has been a marked increase in the pace of banking deals since the financial crisis, (excluding government-assisted transactions), recent deal activity remains somewhat flat. There were 285 deals in 2015 representing $27 billion of announced deal value. While five mega-deals accounted for $14 billion or 54% of announced deal value, the majority of transactions related to consolidation amongst banks with less than $1 billion in assets.
• There were 331 deals in 2015 in the other (non-bank) financial services sector, with an announced deal value of $91 billion. This includes a record 19 mega-deals representing $79 billion or 87% of the total announced deal value. Financial technology and specialty finance transactions dominated this segment, representing a total of 259 deals and 86% of the total announced deal value in 2015. Pervasive and continued advancements in technology will drive substantial growth in financial technology deals, spanning the financial services spectrum. Expect sustained mid- to high-teen deal multiples for innovative firms with a proven track record of high quality growth.
• Insurance represented the most active financial services subsector, with 521 transactions representing an announced deal value of $143 billion. While 451 insurance brokerage deals represented 87% of insurance deal volume, they only accounted for around 2% or $3 billion of announced deal value. Insurance underwriter acquisitions by strategic acquirers accounted for the lion’s share of announced deal value.
• Asset management deal activity remains robust, with 130 deals in 2015, compared to 91 deals in the prior year. Average deal values for announced asset management deals, excluding mega-deals, appears to have declined from $108 million to $88 million over the same period. While deal activity remains strong, the decline in pricing likely reflects the impact of recent financial market volatility on valuations, narrowing the bid-ask spread between buyers and sellers.

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Focused growth: A bigger role for private equity
Although private equity deal activity has tripled since its low point in 2009, financial services M&A remains dominated by corporate buyers. Corporates represented 1,169 deals with a disclosed deal value of $252 billion, compared to private equity investors, which represented 98 deals with a disclosed deal value of $12 billion. While corporates will likely continue to dominate larger, balance sheet-heavy deals in more-highly regulated subsectors, private equity firms will play an increasingly dominant role in deals involving commercial lenders, specialty finance companies, financial technology firms, insurance brokerage firms, and asset / wealth managers.
Of the 98 private equity deals announced in 2015, 48 related to insurance brokerage, 16 related to financial technology and six related to specialty finance transactions. These three subsectors accounted for over 71% of all private equity-backed deals in 2015. We believe these three subsectors will continue to represent the most significant areas for investment by private equity firms.
DISRUPTION AND EVOLUTION: KEY TRENDS TO WATCH
Continued improvement in the U.S. economy, characterized by sustained GDP growth, declining unemployment, historically low interest rates, lower energy prices and growing consumer confidence, gave buyers and sellers the confidence to push forward with deals in 2015. While recent financial market volatility and global economic concerns have tempered growth expectations in the near-term, we believe the pace of financial services deal activity will persist.
We believe the following key trends and themes will drive M&A activity across the financial services sector over the coming years:
• The impact of technology is pervasive, from the use of big data to understand customer behavior and improve underwriting, to driving new customer and asset acquisition. Growth in emerging collaborative technologies such as blockchain are already impacting recordkeeping and transaction processing capabilities across the financial services sector. Continuous disruption and disintermediation by technology-enabled market entrants will spur innovation and deal activity.
• Regulators will continue to play an integral role in the banking, insurance and consumer finance subsectors, intensifying their interactions with incumbents and new entrants. While uncertainty over the extent and nature of regulatory oversight remains, savvy investors will look through the regulatory white noise and seek to execute deals rather than wait on the sidelines for future clarity.
• The largest financial institutions will continue to divest non-core businesses while competing aggressively with new entrants for growth; expect growth in deal activity as incumbents seek to use their considerable capital to acquire knowledge and market share.
• Innovation and investment will be drawn towards business models that are scalable, highly data intensive and capital light.
• The proliferation of financial services offerings for the nonprime and underbanked segments will continue. Technology will increasingly enable more efficient and effective underwriting, streamlined processing and servicing, and disintermediation across the sector.
• Scale from consolidation will become critical for an increasingly commoditized financial services sector; growth from the realization of cost synergies and footprint / product expansion will continue to spur deal activity.
• Challenging organic growth opportunities and a historically low interest rate environment means new asset generation remains difficult. The inevitable, albeit measured increase in interest rates, will enhance lender profitability, increasing their attractiveness to investors.
• While historically less prevalent compared to other industries, expect activist investors to play an increasingly active role in driving M&A activity across the financial services spectrum.
CLOSING THOUGHTS
The pivotal role of technology is giving rise to structural changes across the financial services sector. As the industry adapts and evolves, M&A activity will play a continued role in this growth story. Investors who understand the impact of key risks and drivers of deal value at the most granular level will be in a position to execute the most successful transactions. A robust and deeply analytical diligence process by sellers and buyers will be of critical importance to ensure that contingencies, synergies and risks are identified and quantified before the consummation of a potential transaction.
Source: Alvarez & Marsal – http://bit.ly/1Q4XBkK

admin | 05.02.16

Ten Years in Software & Technology M&A

In the last 10 years, the software & technology space has grown on its own in the pure play tech space, as well as for companies in regulated sectors where hi-tech solutions are addressing rapid change – particularly in health care information technology (HCIT), financial services technology (Fintech), and security.
Healthcare-related software companies in particular have driven substantial growth in the space. This was driven in part by the demands of adhering to new regulations, especially those instituted as a result of the Affordable Care Act. In addition, HC insurance companies have been slow to adopt technologies to improve efficiencies. Pushed in part by the ACA regulations, large insurers are buying up software companies to quickly ramp up to 21st century technological solutions.

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Financial technology companies – have transformed how B-to-B and B-to-C transactions take place. Think Apple Pay, Square and Pay Pal. In the last several years, the demand for “payment processes” has driven phenomenal growth. Business and consumers want to transact securely online.
Furthermore, the need to mitigate the risk of being hacked, in light of several high profile global security breaches at companies around the globe, has led to an increased investment in tech security companies. In particular, companies offering “endpoint and perimeter cybersecurity solutions– solutions that seek to prevent attacks at the point of network access – are numerous. Consolidation of these companies offers a ripe opportunity for tech investors (“Deal Drivers Americas 2015”, Merger Market, 2015).
In today’s ever-competitive environment with multi-round auctions and accelerated timeframes, it has become increasingly more critical to have the right industry expertise. Our dedicated team of seasoned S&T professionals collectively looks at over 100 software and technology companies each year. With our extensive experience and know-how, we can quickly analyze key value drivers and help you assess and validate your investment thesis early in the process.

admin | 04.18.16

The 10 Year Evolution of Global Private Equity Investing

As we look back over the last 10 years since the inception of the Global Transaction Advisory Group at Alvarez & Marsal, there has been both an evolution and maturation in the private equity investment model during the period.  In the more mature markets such as North America and Western Europe, this has largely resulted from the worldwide financial crisis of 2008; the shifting dynamics of emerging markets in such places as Latin America, India and China significantly influenced private equity investing in those regions as well.

Prior to the financial crisis of 2008, with soaring stock markets and real estate values, the availability of cheap debt to finance deals and generally less competition, private equity investing in North America and Western Europe was a game of buy low, sell high and improve returns largely though financial engineering.  However, post-financial crisis the game has changed dramatically – with private equity buyers facing intense pressure to deploy capital resulting from a massive capital overhang along with an extended low interest rate environment – these factors have driven up valuations tremendously.  Today, in order to create alpha, private equity investors in these regions are required to buy high and sell even higher – creating value and hence returns by enhancing their investments through operational performance improvement initiatives.

The emerging markets of Latin America, India and China have been influenced by different variables.  At the beginning of the historical 10 year period, private equity investing in these regions relied heavily upon riding minority investments to exit through the ever-rising public markets (IPO).  However, over the last few years, with these regions being impacted by currency devaluations and political instability, public markets have crashed closing the IPO window indefinitely.  These factors, when combined with  an increasing level of competition as more private equity investors expand globally in search of lower valuations, have caused the investment model to mature into that more like North American and Western Europe.  Accordingly, private equity investors are demanding control investments in these regions whereby they can effectuate positive changes to their investments again largely through the use of operational performance improvement initiatives.