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Financial institutions M&A: Sector trends - July 2020

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July 2020

We highlight the key European M&A trends in the first half of 2020, and provide our insights into the outlook for M&A moving forward.

Introduction

The COVID-19 pandemic has ravaged the European financial services sector, sending shockwaves across the FIG M&A landscape. It is no surprise that M&A volumes have plummeted. Yo-yoing valuations, buyer conservatism and the promise of "cheaper" stressed / distressed opportunities have compounded a cavernous rift between seller and buyer expectations. Reality is slowly sinking in—as the possibility of a v-shaped economic recovery becomes increasingly bleak, concern is growing around whether IFRS 9 loss estimation is much more than educated guesswork.

But all is not lost. The resilience of established financial institutions, fortified in the decade since the global financial crisis, agility afforded by digitalisation and evolution of customer interaction with financial services have contributed to M&A hotspots which burn bright amidst market gloom.

In this edition, we hone in on those hotspots and highlight the key M&A trends across Europe and the UK. Focusing on Banks, Fintech and Other Financial Services, we also provide our insights on the outlook for M&A in H2 2020 and beyond.

Key highlights from H2 2019 include the following:

  • Banks: Surge in strategic M&A, post-easing of lockdowns, as pent-up deal-making prowess is unleashed.
  • Fintech: Financial sponsors demand more bang for buck, as equity valuation volatility wreaks havoc for funding rounds.
  • Asset/Wealth Management: Differing bank prerogatives drives deal-making— some European banks tag-out from non-core business lines, while others tag-in for stable returns.
  • Payments: Lockdown utilisation levels encourage cross-border operators to scale-up and private equity investors to pile-in.
  • Stock Exchanges/Clearing Houses/Trading Venues: Clash of the pan-European titans—M&A plans signalled by LSE, Euronext and Deutsche Börse.
  • Brokers/Corporate Finance: Thinning of the herd continues as "traditional" brokers struggle to remain profitable amidst encroachment by Bulge Bracket and disruption by fintech.
  • Consumer Finance: A time of temperance as COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures take their toll.
  • Specialty Finance/Marketplace Lending: Panacea or plague—what will the true impact of accreditation for government-backed loan schemes be?

M&A Forecast legend

European financial services M&A trends

Europe's post-GFC leaner and better-capitalised banks are put to the test by the COVID-19 pandemic

Banks with stronger balance sheets capitalise on M&A opportunities amidst COVID-19 market turmoil, while their weaker peers consolidate to survive.

vault

As the technicolour gloss of unicorns fade, investors attempt to back the right horses

H1 2020 heralds an entirely new era for fintech, a market segment which scarcely existed at the time of the global financial crisis. Many founders and investors, who have enjoyed a bull run since 2015, have had their first taste of the bear markets which banks endured in the years following 2008.

Buckingham Palace gate details

Asset/Wealth Management

Differing bank prerogatives drive deal-making—-some European banks tag-out from non-core business lines, while others tag-in for stable returns.

stock market display

Payments

Lockdown utilisation levels encourage cross-border operators to scale-up and private equity investors to pile-in.

banknotes

Stock Exchanges/Clearing Houses/ Trading Venues

Clash of the pan-European titans—-M&A plans signalled by LSE, Euronext and Deutsche Börse.

bank

Brokers/Corporate Finance

Thinning of the herd continues as "traditional" brokers struggle to remain profitable amidst encroachment by Bulge Bracket and disruption by fintech.

stock display

Consumer Finance

A time of temperance as COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures take their toll.

credit cards

Specialty Finance/Marketplace Lending

Panacea or plague—-what will the true impact of accreditation for government-backed COVID-19 loan schemes be?

stock market display
stock display

Brokers/Corporate Finance

Financial Institutions M&A sector trends: Brokers/corporate finance — H1 2020 and outlook for H2 2020

Insight
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5 min read

Thinning of the herd continues as "traditional" brokers struggle to remain profitable amidst encroachment by Bulge Bracket and disruption by fintech.

 

Overview

Current market

  • Consistent; active

We are seeing

  • Brokers expand to weather the COVID-19 climate:
    • Inorganic strategies (e.g., Interactive Investor's acquisition of The Share Centre)
    • Organic strategies (e.g., Houlihan Lokey's launch of its European equities advisory business)
  • Stiff competition for "traditional" brokers from online and commission-free trading offerings:
    • Expansion of foreign platforms into the UK (e.g., Robinhood)
    • New UK startups (e.g., Freetrade)

Key drivers/challenges

  • High buyer / investor appetite:
    • Trade consolidators seeking to galvanise business models (e.g., flatex's acquisition of DeGiro) and diversify client offerings (e.g., Frankfurter Bankgesellschaft's acquisition of 75.1% of IMAP M&A Consultants)
    • Foreign investors seeking to tap into Western European opportunities and talent (e.g., Bank of China's acquisition of Goodbody Stockbrokers)
    • Management backing themselves (e.g., MBO of Deutsche Regis)
    • Wider market appetite (e.g., FRP Advisory's £80 million AIM IPO)
  • Availability of stressed opportunities (e.g., Beltone Financial's disposal of 60% of Auerbach Grayson)
  • Increasing emphasis on ESG investing—growing demand for:
    • ESG investment opportunities (e.g., Clim8's successful Crowd funding round)
    • Growing customer demand for ESG investment research (e.g., Morningstar's acquisition of Sustainalytics)

Trends to watch

  • Consolidation in the US driving deal-making in Europe (e.g., Morgan Stanley's acquisition of E*Trade Financial)
  • Growing focus on online and digital channels for product delivery
  • Uptick in "acqui-hires"—smaller transactions aimed at securing specific expertise / client teams

Our M&A forecast

Thinning of the herd is likely to continue as "traditional" brokers struggle to remain profitable in a market encroached upon by Bulge Bracket and disrupted by fintech

 

Publicly reported deals & situations

High investor appetite

Foreign investors:

  • Credit Suisse (China): Acquisition of 17.7% of CS Founder Securities (June 2020)
  • BCAP Partners (Germany): Equity investment in Orka Investments (May 2020)
  • Bank of China (Ireland): Acquisition of Goodbody Stockbrokers (March 2020)

MBOs:

  • Deutsche Regis (Philippines): Acquisition of 49% from Deutsche Bank (January 2020)

Market appetite:

  • X-Trade Brokers (Poland): Disposal by Systexan of 19% stake (May 2020)
  • FRP Advisory (UK): £80 million AIM IPO (April 2020)

 

Market consolidation to achieve economies of scale & scope

Market highlight:

Morgan Stanley's acquisition of discount broker E-TRADE for US$13 billion is the biggest takeover by a US bank since the global financial crisis

Acquisitions:

  • Real I.S. (Germany): Acquisition of 15% of Real Exchange (June 2020)
  • Credit Bank of Moscow: (Russia) Acquisition of Investment Bank Vesta (May 2020)
  • flatex (Germany): Acquisition of DeGiro (April 2020)
  • Banque Internationale Arabe de Tunisie (Tunisia): Acquisition of additional 47.92% of Tunisie Valeurs (April 2020)
  • Morgan Stanley (US): Acquisition of E*Trade Financial (February 2020)
  • Interactive Investor (UK): Acquisition of Share PLC (February 2020)
  • Frankfurter Bankgesellschaft (Germany): Acquisition of 75.1% of IMAP M&A Consultants (January 2020)

Partnerships:

  • S&P Dow Jones Indices (UK): Multi-asset benchmark development JV with HIS Markit (April 2020)

 

Mounting competition

Digital "challengers":

  • Ginmon (Germany): Equity investment by BCS (June 2020)
  • Freetrade (UK): Successful £4.5 million Crowd funding round (May 2020)
  • Clim8 (UK): Successful £1.35 million Crowd funding round (May 2020)
  • TransFICC (UK): Successful £5.7 million Series A funding round, led by Albion VC (April 2020)
  • Yova (Germany): Successful €3.7 million Venture funding round, led by Wi Venture (April 2020)
  • Trade Republic (Germany): Successful €61.6 million Series B funding round, led by Accel and Founders Fund (April 2020)
  • Robinhood (UK): Launch in the UK (February 2020)

Organic encroachment:

  • Lunar Bank (Denmark): Stock trading platform JV with Saxo Bank (April 2020)
  • TP Icap (UK): Launch of UK special situations desk (February 2020)
  • Houlihan Lokey (UK): Launch of European equities advisory business (January 2020)

Inorganic encroachment:

  • Morningstar (Netherlands): Acquisition of 60% of Sustainalytics (April 2020)

Alternatives to "traditional" broking:

  • Bricknode (Sweden): Acquisition of Lendysoft (June 2020)

 

Click here to download Financial services M&A experiences shortness of breath in H1 2020 (PDF)

 

 

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© 2020 White & Case LLP

 

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