C&A INSIGHT - Financial Services M&A Activity - 2019

Through the first three quarters of 2019, dealmaking in the financial services sector has continued apace, with $197.0 million in value across 667 deals. By year-end, we expect deal value will come close to matching full-year 2018 highs. In general, dealmaking in the sector—which includes companies in the banking, insurance, asset management, institutional and specialized financial industries—has been an extremely steady portion of the M&A environment, comprising 9.7% to 9.8% of deal flow in each of the last four years. These figures illustrate how central the sector is to overall M&A activity.

Within financial services, insurance has been a hotbed of dealmaking activity so far in 2019. Insurance brokerage M&A was a specific focal point in 2018, and prolific dealmaking in the subsector seems set to continue as PE firms favour the industry due to predictable margins and cash flow. Assured Partners, a middle-market insurance brokerage company based in Florida, was re-acquired in May 2019 by GTCR, who previously owned Assured until 2012. GTCR appears to be pursuing a buy-and-build strategy; Assured Partners has already bought nine companies via add-on deals since the acquisition. Another large insurance deal of 2019 was the take-private of Aspen Insurance Holdings by Apollo Global Management (NYSE: APO). This is hardly Apollo’s first foray into insurance; it purchased Athene Holding in 2013 and has used insurance premiums from its investment as a low-cost source of permanent capital, a tactic that has spurred several other firms to follow Apollo’s lead.  

Elsewhere in the sector, banks have been steadily consolidating since before 1990. This still holds true as banks continue to consolidate for myriad reasons. It has been suggested that the Dodd-Frank Wall Street Reform and Consumer Protection Act led to regulatory-driven amalgamation (as well as a decrease in bank failures) mainly on behalf of smaller community banks that had to combine in order to handle the task of complying with new regulations. In addition, the Consumer Protection Act forbids big banks from acquiring smaller ones (though they are still permitted to grow organically). Data from a policy paper by the Minneapolis Federal Reserve Bank indicates that adding two members to the compliance department would make a third of small banks unprofitable, highlighting the impact of even slight regulation increases.

However, changes stemming from the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act may further increase the speed of bank consolidation by allowing for growth without higher costs and increased scrutiny. The act raises the asset threshold requirements for small banks (above which they become more highly regulated), reduces reporting requirements, extends examination cycles and grants community banks exemption from the Volcker Rule in terms of proprietary trading and having relationships with hedge funds and PE firms. These regulatory rollbacks have led to regional and national banks consolidating for scale, as they now have the leeway to do so. Two deals completed in the quarter illustrate this trend. First, the acquisition of Michigan-based Chemical Bank by TCF Financial (NASDAQ: TCF) will create a larger player in the Detroit metro area (seventh-largest in the area, with 5.6% of market share in Detroit and 8% of market share in Michigan). Second, the acquisition of Florida Community Bank makes Synovus Bank (NYSE: SNV) a top five regional bank (by deposits) in the Southeast.

Alongside regulatory shifts, the face of banking itself is changing. Brick and mortar banks are being phased out and access to services via phones, tablets and laptops is a growing path. More small and midsized banks are combining to stay alive in the face of increased digitization, a trend in which big banks can participate by expanding their technology budgets. For instance, J.P Morgan (NYSE: JPM) currently has an $11.4 billion technology budget, a 5.6% increase from their 2018 allocations in the space. One large merger that displays the impact of technological change and innovation is that of BB&T and SunTrust. The deal, expected to close later this year, will be the largest American bank merger since the financial crisis. The two banks will form a $66.0 billion company, creating the sixth-largest bank in the US. Executives at both firms emphasized the importance that digitization had on the merger as both banks sought to expand to reduce costs, especially in technological advancement.

The digitization of financial services is one avenue that can help level the playing field between large banks and their smaller competitors. Banks see technological disruptions coming from smaller VC-backed companies who are incrementally chipping away at profits by offering consumers easily accessible banking features. Often, startups will pay higher interest rates to provide their consumers with lower costs. Looking forward, we expect to see more banks embrace these changes through consolidating or acquisitions of smaller competitors to gain their technological capabilities. We also think it is likely that banks will acquire newer fintech companies to attempt to push to the forefront of the technological disruption occurring in the private markets.

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