Financial institutions M&A: Sector trends - June 2018
What's inside
June 2018
We highlight the key European M&A trends in the first half of 2018, and provide our insights into the outlook for M&A moving forward
Introduction
In 2017, the European economy expanded by 2.5 per cent, its strongest performance since before the global financial crisis. However, economic growth has done little to ease mounting stakeholder pressure on the bloc’s financial institutions. Persistently low interest rates, increasing regulatory burden, competition from fintechs, unavoidable IT cost hikes and elevated consumer expectations are only some of the factors which have led to declining revenues for many of the region’s largest and most well-established financial services businesses.
The call of the global financial elite in Davos for consolidation across Europe’s financial services industry was somewhat inevitable.
Banks have emerged from the global financial crisis with a clearer picture of how they need to be structured. Strategic M&A is back as banks across Europe consolidate and lean in to the fintech revolution.
State-aided banks are a fertile source of deal flow. Institutions continue to deleverage balance sheets and dispose of non-core businesses, while governments seek privatisation. But make no mistake — deals are hard fought, with risk allocation needing to be carefully managed at every turn.
Fintech M&A volumes and values soared in H1 2018 as banks embraced fintech as a key enabler of operational efficiency and customer satisfaction. Private equity and venture capital houses continued to invest aggressively in the space, buoyed by a series of strong exits and growing buyer demand.
New regulation, competition from fintech disruptors and ever-more sophisticated and demanding retail investors (wanting more for less) have forced asset/wealth managers to build scale through mergers of equals, acquisition of smaller players and buy-in of technology. The global financial crisis is behind them, but the new challenges are no less daunting.
M&A in payment services is red hot, but anti-trust concerns in the trading platform space and dominant incumbents in the custodian sub-sector has meant deal activity as a whole has been uneven.
Regulation has put the brakes on deal activity involving credit card providers and payday lenders, but specialty and marketplace lenders are continuing to attract large amounts of strategic and private equity interest.
Consolidation activity intensifies with possible mega-mergers on the horizon
White & Case partner Gavin Weir shares his predictions for the asset/wealth management sector over the next 12-18 months and discusses what has been driving consolidation within the sector.
The whirlwind of payments M&A gathers force. The perfect storm of growing customer demand, regulation-encouraged competition and mega-returns has got buyers and sellers transacting at record pace.
M&A in payment services is red hot, but anti-trust concerns in the trading platform space and dominant incumbents in the custodian sub-sector has meant deal activity as a whole has been uneven.
Financial sponsor investments and exits are likely to support high levels of deal activity. Larger market participants also turn to M&A as they move to build scale in response to increasing competition and customer demand.
Current market
Upward, very high activity levels
We are seeing
Financial sponsor-led and established bank M&A
Market consolidation of service providers and systems operators
Polarised reaction to ICOs and cryptocurrency dealing
Key drivers
Consumer demand for personalised, value-added services
Regulatory initiatives:
Increased competition through system operator unification
Open-banking facilitated through PSD2
Rationalisation of payment infrastructure:
Expansion of service offerings
Access to new customer bases
Margin squeeze from intense competition (e.g., alternative payment channels and fintechs)
Operational capability and cost optimisation
Trends to watch
Continued financial sponsor interest
Consolidation — fewer global and integrated service providers
Increasing investment in fintech – search for:
Data protection and cybersecurity risk management tools (e.g., AI and advanced authentication technology)
More efficient and cost-effective transfer technology (e.g., instant payment processing)
Regulator intervention (e.g., UK Payment Systems Regulator's new code of practice is expected in September 2018)
Diminishing role of traditional payment intermediaries
Stock exchanges & clearing houses
Efficiency the motivator, as operators seek scale. Prolonged low trading volatility sees trading platforms turn to M&A in response to shareholder pressure for improved profitability.
Our M&A forecast
Shareholder pressure to increase profits may force operators to seek out economies of scale and scope, making inorganic expansion a priority. However, antitrust concerns may mean that M&A activity is centred on regional consolidation and vertical integration.
Current market
Upward
We are seeing
Regional market consolidation, with some signs of platforms favouring 'home' markets
Inorganic vertical integration
Increasing acceptance and utilisation of fintech
Increasing competition in the UK clearing space
Key drivers
Shareholder pressure to increase profits, given prolonged low trading volatility:
Achievement of economies of scale through acquisitions
Diversification into alternative trading tools (e.g., data provision for fixed-income and ETF products)
Increase of service offerings (e.g., clearing and cryptocurrency services)
MiFID II resulting in stock exchanges providing increased research coverage for their smaller companies
Trends to watch
Antitrust regulators restricting mega-mergers
Increasing dependence on fintech (particularly AI and blockchain)
Possible impact of Brexit on London's €-clearing business:
Diversification to clearing in foreign currencies
Aggressive competition between European exchanges to promote their 'home' markets
Fragmentation of European markets
Increasing clearing costs leading to promotion of New York as an alternative venue
Custodians
Outsourcing and digital offer options, but incumbents remain cautious.
Our M&A forecast
As cryptocurrency markets mature, custodians may look to expand into digital asset services. Deals like BitGo's purchase of US-based digital custodian Kingdom Trust may spark similar transactions in Europe.
Global players enjoy dominant positions and are under no immediate pressure to chase deals.
Current market
Flat
We are seeing
Uptick in outsourcing arrangements, including utilisation of digital efficiency options
Custodians with strong balance sheets expanding inorganically
Key drivers
Identification of new revenue streams given low net-interest income
Higher operating cost bases and heightened regulatory enforcement risk
Trends to watch
Expansion of global players into digital asset custody services, through acquisitions and organic growth
Payments: Publicly reported deals & situations
Payments M&A is expected to increase materially in 2018.*
Private equity bonanza
Deal highlight
Spectacular exits continue. Hellman & Friedman completed its acquisition of Nets for more than US$5 billion, to merge the Danish player with Advent's and Bain's Concardis only a few months later. The deal forges a behemoth to compete with the likes of Worldpay, Inc.
Acquisitions:
SoftBank: Acquisition of 14.2% of Paytm (May 2018)
Francisco: Acquisition of Verifone (April 2018)
Equistone: Acquisition of Small World (March 2018)
Nordic Capital: Acquisition of Trustly (March 2018)
Hellman & Friedman: Acquisition of Nets (February 2018)
Disposals:
Index Ventures, General Atlantic and Iconiq: Adyen's IPO on Euronext Amsterdam, involving existing investors disposing of 13.4% of outstanding shares (June 2018)
Bridgepoint: Disposal of Trustly (March 2018)
FPE Capital and MMC Ventures: Disposal of Small World
Polarised reaction to cryptos
ICOs reach new heights, including Block.one's US$4bn ICO (May 2018).
Cryptocurrencies hit an aggregate value of US$800bn in January and slumped to US$260bn by April.**
Support:
Governments:
Sweden: Proposal for creation of e-Krona (April 2018)
Russia: Proposal for creation of "cryptorouble" (January 2018)
Regulators:
French AMF: Dedicated legal framework for ICOs, which is currently under construction and is expected to be effective from January 2019 (May 2018)
Gibraltar GFSC: Support for ICOs on the under-construction Gibraltar Blockchain Exchange (March 2018)
Swiss FINMA: Regulation of ICOs under AML laws or as securities (February 2018)
FIs/Fintech:
Revolut: Introduction of ripple and bitcoin cash to its trading offering (May 2018)
J.P. Morgan: Launch of crypto strategy (May 2018)
Goldman Sachs: Launch of its crypto trading desk (May 2018)
Barclays: Crypto trading JV with Coinbase (March 2018)
Scepticism:
Governments:
UK Treasury Committee: Launch of investigation into digital currencies and DLT (February 2018)
Regulators:
ECB: Proposal to ring-fence crypto trading (May 2018)
UK FCA: Confirmation that cryptocurrency-linked financial offerings are in the regulatory perimeter (April 2018)
FI/Fintechs/Tech majors:
Virgin Money and Lloyds: Bans on credit card customers purchasing bitcoin (February 2018)
Stripe: Withdrawal of support for bitcoin payments (January 2018)
Google, Microsoft (Bing), Facebook, Twitter and LinkedIn: Bans on cryptocurrency advertising (January – March 2018)
Market consolidation
Deal highlight
Ingenico has continued to be an active trade consolidator in 2018. The fast-growing global payments player also acquired Bambora from Nordic Capital in 2017.***
Acquisitions:
Worldline: Acquisition of SIX Payment Services (May 2018)
PayPal: Acquisition of iZettle (May 2018)
Paysafe: Acquisition of iPayments (April 2018)
Edenred: Acquisition of Candex Solutions (April 2018)
Easy2pay: Acquisition of MyOrder (April 2018)
Linxo: Acquisition of Sharepay (April 2018)
Nexi: Acquisition of Banca Carige's merchant acquiring business (March 2018)
Mastercard: Acquisition of Oltio (March 2018)
Visa: Acquisition of Fraedom (February 2018)
FairFX: Acquisition of City Forex (February 2018)
Lighthouse Network: Acquisition of Shift4 (January 2018)
Ingenico: Acquisition of Paymark (January 2018)
JVs:
BNPP, Société Générale and certain other French banks: Launch of new services by mobile payment JV Paylib (May 2018)
Mastercard: Push payments JV with Dream Payments (February 2018)
Visa: Mobile payment and loyalty app JV with Allianz (February 2018)
Mergers:
Nets & Concardis: Merger (June 2018)
B+S Card Service & Payone: Merger (May 2018)
Faster Payment & Bacs: Unification into the New Payment System Operator (May 2018)
Vipps & BankID & BankAxept: Merger (April 2018)
Institutional interest
Acquisitions/equity investments:
DNB Bank: Minority equity investment into Payr (May 2018)
Natixis: Acquisitions of Comitéo, Dalenys and a majority stake in Alter (February – April 2018)
Allianz X: US$35m investment into GO-JEK (April 2018)
Crédit Agricole and Citi: Acquisitions of minority stakes in SETL (February 2018)
ING: Acquisition of 75% of Payvision (January 2018)
JVs:
NatWest: Cardless fast-track payments JV with Carphone Warehouse (June 2018)
Groupe BPCE: Money-transfer JV with TransferWise (June 2018)
Santander: Payments JV with Ripple using Blockchain xCurrent and RippleNet technologies (March 2018)
HSBC: Corporate payments JV with PayPal (March 2018)
Western Union: Money transfers JV with Ripple (February 2018)
