Financial institutions M&A: Sector trends - January 2019
What's inside
January 2019
We highlight the key European M&A trends in the second half of 2018, and provide our insights into the outlook for M&A in 2019
Introduction
As 29 March 2019 draws closer, and the possibility of a ’no deal’ Brexit becomes ever more real, many financial services businesses across Europe are contending with operational uncertainty of monumental proportions. The same businesses are also shouldering the growing strain of market fragmentation, digital transformation, disruptive financial regulation, large-scale IT meltdowns and cybersecurity attacks.
Notwithstanding these pressures, many financial institutions have hardened their resolve that ‘the show must go on’.
Against this backdrop, we analyse M&A activity across 5 main financial services subsectors: Banks, Fintech, Asset/Wealth management, Market infrastructure and Consumer finance. In this report, we highlight the key trends across Europe and the UK in 2018, and provide our insights into the outlook for M&A in 2019 and beyond.
European financial services
M&A trends
Regional and domestic consolidation tops the agenda
2018 has been a transformational year for fintech M&A. Deal values and volumes have reached new heights as established financial institutions pin hopes on well‑placed bets to deliver competitive edge and market share. VC and late‑stage investment firms are also actively stoking the fintech fire.
Payment services M&A retains its spark on the financial services landscape. Stock exchanges poise for strategically significant deals. And, brokers resort to M&A to combat the impact of disruptive regulation.
Payment services M&A retains its spark on the financial services landscape.
Overview
Competition for innovative technology is fierce. Financial sponsors, big banks and, of late, fashion moguls are driving increasingly high multiples for payments businesses across Europe
Current market
Upward, very high activity levels
We are seeing
Financial sponsor and strategic investor-led M&A
Market consolidation and expansion
Regulator-encouraged market competition
Key drivers
High demand from investors with deep pockets:
Financial sponsors—reaping rich rewards on exit
Established banks—customer demand for personalised services from trusted financial services brands
Consumer fashion—controlling the customer journey and experience
Governments—seeking efficiency of financial market infrastructure
Inorganic scaling-up of market players through acquisitions, vertical integration and JVs with heavyweights:
Access to wider range of customers
Expansion of service offerings (particularly point-ofsale finance)
Cost and operational efficiency
Organic scaling up of market players through IPOs, fundraisings and expansion into new territories/ business lines
Regulator prerogatives:
Open-banking through PSD2
Increase competition through hand-on policing (e.g., UK Payment Systems Regulator’s probe into cards sector competition)
Whilst rumblings of an overheated market have gotten louder, M&A continues at pace. Recently, we have seen fashion brands participating in fundraisings, previously the domain of experienced PE investors.
Jan Jensen, Partner, Stockholm, EMEA Private Equity Group
Trends to watch
Continued financial sponsor interest (though “overheated market” rumblings will grow loud
Consolidation—fewer global but integrated service providers
Scaling-up of IT infrastructure in response to:
Customer expectations (Visa, MasterCard and Revolut have already experienced IT outages)
Growing cybersecurity threats
Our M&A forecast
High levels of deal activity are likely to be buoyed by strong financial sponsor and established bank interest in payment services, as the Nordics and Western Europe gravitate towards becoming cashless societies.
Stock exchanges/Clearing houses Stock exchanges
Stock exchanges poise for strategically significant deals.
Overview
Transformational deals a real possibility, as leading exchanges stock up on M&A pedigree at management level
Current market
Upward
We are seeing
Inorganic expansion, including internationally and through JVs
"No-deal" Brexit planning—migration of activities and businesses out of London (particularly to Dublin, Brussels, Frankfurt and Amsterdam)
Key drivers
Bolt-on acquisitions:
Diversification into information services and post trade services
Realisation of cost synergies through acquisition of smaller trading platforms
Investment in trade efficiency improvement technology
Utilising M&A strategies to:
Overcome high organic entry barriers (e.g., IP, network effect and post-trade efficiencies)
Deliver structural growth
Banks seeking to offload liquid assets (e.g., SocGén's and RBS's disposal of minority interests in Euroclear)
MiFID II resulting in stock exchanges needing to provide increased research coverage for small/ medium-cap stocks (historically serviced by brokers)
Local governments resisting foreign ownership (e.g., MOEX and WSE)
As management teams with strong M&A pedigree take the helm of important global players, including LSEG and ICE, transformational M&A seems high on board agendas.
Hugues Mathez, Partner, Paris, EMEA M&A Group
Trends to watch
Possibility of transformational M&A—exchanges seeking to boost earnings through delivery of largescale cost synergies
Antitrust concerns continuing to need careful management to achieve successful completion of deals
Increasing trust of DLT (particularly for settlement)
Impact of ESMA’s transitional, conditional permits granting access to key UK market infrastructure following 29 March 2019
Our M&A forecast
Transformational M&A is likely to creep higher up the agenda of the boards of larger exchanges, but antitrust concerns as well as local stakeholder resistance are likely to need careful attention and navigation
Brokers/Trading service providers
Brokers resort to M&A to combat the impact of disruptive regulation.
Overview
MiFID II, market competition and capital market pressures propel the wave of consolidation across European stockbrokers
Current market
Upward, high activity levels
We are seeing
Market consolidation
Acquisitions by financial sponsors and foreign strategic investors (particularly Chinese buyers with material commodities investments)
Activist pressure to improve investor returns
Mounting tension between brokers and departing senior executives
Key drivers
MiFID II resulting in lower revenues and thinner margins:
Asset managers have reduced external spend on investment research and shrunk “preferred” broker lists
Asset managers are favouring larger liquid stocks over thinly traded small/medium-cap stocks, the bread and butter of smaller brokers
Broker business models are already more sensitive as a result of specialisation
Increasing market competition:
Investor appetite for new asset classes, which “traditional” brokers do not cover (e.g., crypto)
Competitors slashing trading fees to stay competitive
Commission squeeze from automated stock-trading
New market entrants offering “traditional” asset classes
Stock exchanges publishing small-cap research at heavily discounted rates
Macro pressures on revenue:
Tepid IPO markets
Over-brokered market—brokers are more reliant on deal fees, resulting in fiercer competition for the same mandates
Local regulators encouraging domestic market consolidation
The great broker shakeout has begun. MiFID II has driven a stake through the heart of outmoded business models. Brokers have a choice: Eat or be eaten.
Franck De Vita, Partner, Paris, EMEA Private Equity Group
Trends to watch
Cultural clashes hampering rapid market consolidation
Recalibration of broker business models—ultimately, resulting in fewer but stronger market participants:
Leaner operational cost bases (particularly IT)
Diversification—revenue generation from bolt-on services and servicing a broader range of corporate clients
Re-focus on higher demand equity research (i.e., larger liquid stocks)
Our M&A forecast
Pace of market consolidation is likely to quicken as brokers seek scale to weather the perfect storm of disruptive regulation, increasing market competition and challenging economic conditions
A UK cash-free society looms closer as card payments in 2017 eclipse cash payments for the first time (13.2 billion card transactions vs 13.1 billion cash transactions)*
High appetite and deep pockets
Private equity—acquisitions/equity investments:
Draper Esprit: Acquisition of minority stake in Form3 (November 2018)
Bessemer Venture Partners:Acquisition of minority stake in Previse (August 2018)
Third Point: Acquisition of minority stake in PayPal (July 2018)
CJJ Investments: Acquisition of Microgen Financial Systems (July 2018)
EQT: Acquisition of Banking Circle (July 2018)
Dunedin: Acquisition of minority stake in Global Processing Services (June 2018)
Institutional—acquisitions/equity investments:
Danske Bank: DKK10 million investment in Spiir’s Nordic API Gateway (December 2018)
Deutsche Bank: Acquisition of minority stake in ModoPayments (August 2018)
ING: Acquisition of minority stake in TransferMate (July 2018)
Institutional—JVs:
Aviva & Amazon Pay: Car and home insurance JV with Amazon Pay (October 2018)
UniCredit Bank & Alipay: Hungarian cashless payments JV with Alipay (October 2018)
Nordea Bank, Santander and Sbanken & Apple Pay: Norwegian payments JV (June 2018)
KBC Bank & Garmin Pay: Irish digital payments JV (June 2018)
High street/high fashion— acquisitions/equity investments:
H&M: Acquisition of minority stake in Klarna (October 2018)
High street/high fashion—JVs:
LVMH Group: SWIFT Global Payments Innovation JV with FIS (November 2018)
Governments:
ECB: Launch of Target Instant Payment Settlement system (December 2018)
Scaling up of market players
Wirecard has joined Germany’s “blue chip” DAX index and plans to double its revenue to >€3 billion by 2020**
Acquisitions:
Visa: Acquisition of Earthport (December 2018)
TransferMate: Acquisition of Devisenwerk (December 2018)
Nexi: Acquisition of Banca Carige’s merchant acquiring business (October 2018)
Afterpay: Acquisition of ClearPay (August 2018)
Nets: Acquisition of Dotpay/eCard (June 2018)
Vertical integration/ point-of-sale lending:
EVO Payments: Acquisition of ClearOne (October 2018)
Klarna: Acquisition of Close Brothers Retail Finance unit(September 2018)
JVs:
Marqeta: Payment cards and processing JV with Visa (October 2018)
Monzo: International payments JV with TransferWise (June 2018)
IPOs:
Escrow.com: Freelancer’s plans to IPO Escrow.com (August 2018)
New licences/territories/business lines:
Revolut: Successful grants of Lithuanian banking licence, Singaporean remittance licence and Japanese financial services authorisation,as well as launch of openbanking enterprise marketplace for business banking customers (June – December 2018)
Apple Pay: Launch in Germany (December 2018)
Swift: Pilot of new system to speed up banks’ cross-border transfers and reduce errors (December 2018)
Bancomat: Launch of Bancomat Pay (November 2018)
figo: Successful securing of German payments institution license (August 2018)
Fundraisings:
Form3: Successful US$13 million Series B funding round, led by Graze and Draper Esprit (November 2018)
PIP: Successful €1 million angel fundraising (November 2018)
Previse: Successful US$7 million Series A funding round, led by Augmentum Fintech and Bessemer (August 2018)
PPRO Group: Successful US$50 million funding round, led by PayPal (July 2018)
Survival of the fittest
Plynk: Entry into liquidation (June 2018)
Regulatory intervention
UK CMA: Concerns over PayPal’s acquisition of iZettle (November 2018)
Swiss Competition Commission: Probe of Aduno, Credit Suisse, PostFinance, Swisscard and UBS over a suspected boycott of Samsung and Apple payment solutions (November 2018)
UK FCA: Application of its “principles for business” to payment services firms (August 2018)
European Commission: Payment service providers operating in multiple EU Member States to appoint central contact points to ensure domestic AML compliance (August 2018)
UK Payment Systems Regulator: Launch of investigation into cards sector competition (July 2018)
UK FCA: Payment service providers to handle complaints from victims of push-payment scams in compliance with UK FCA rules (June 2018)
Swedish Sveriges Riksbank: Launch of enhanced supervisory interest in payment systems (June 2018)
Stock exchanges/Clearing houses
Inorganic growth
Acquisitions:
Euronext: Acquisition of 50.6% of Oslo Børs VPS and launch of all-cash takeover offer for outstanding shares (December 2018)
SIX: Acquisition of remaining 75% of SECB Swiss Euro Clearing Bank (September 2018)
Fexco: Acquisition of Thomas Global Exchange (August 2018)
London Stock Exchange: Acquisition of additional 15% of LCH (October 2018)
Horizontal cooperation:
SIX & Clearstream: Fund processing JV (June 2018)
International Expansion
Deutsche Börse: Launch of its European Energy Exchange in Singapore (November 2018)
London Stock Exchange: Shanghai-London Stock Connect JV with Shanghai Stock Exchange International (September 2018)
Digital world demands bolt-on acquisitions
Euronext: Acquisitions of 78% of Commcise and 97.3% of FastMatch (August- December 2018)
Deutsche Börse: Successful testing of Project BLOCKBASTER securities and cash settlement using blockchain (October 2018)
Nasdaq: Acquisition of Cinnober (September 2018)
London Stock Exchange: Acquisition of 16% of Acadiasoft (June 2018)
Banks seeking returns
Société Générale: Disposal of 2.05% of Euroclear (November 2018)
Commerzbank, Deutsche Bank and Nomura: Disposal of minority stakes in Banks seeking LCH (October 2018)
"Challenger" competition
NEX Exchange: Acquisition of majority stake by Oliver Hemsley (July 2018)
Aquis Exchange: AIM IPO at £73 million valuation (June 2018)
Regulatory intervention
Bank of England: Launch of UK Money Markets Code (September 2018)
ESMA: Non-EU trading venues could be required to comply with tick-size regime under MiFID II (June 2018)
Brexit contingency planning
Euronext: Migration of Irish equities settlement business from London to Belgium (December 2018)
Deutsche Bank: Migration of 50% of euro clearing activities from London to Frankfurt (July 2018)
London Stock Exchange: Application for trading licences in the Netherlands (July 2018)
EU regulators have cracked down on the €1 trillion CFDs market, hitting the biggest players including IG, CMC Markets and Plus500***
High investor appetite
Financial sponsors:
Atlas: Acquisition of 20% of Kepler Cheuvreux (June 2018)
Strategic investors:
Banca Generali: Acquisition of NEXTAM Partners (November 2018)
Market consolidation to achieve economies of scale & scope
Deal highlight
White & Case advised Natixis on its acquisition of a 5% stake in Oddo BHF, as the two groups seek to develop a market‑leading player in equity research and sales operations covering continental European equities
Scope:
AllianceBernstein: Acquisition of Autonomous (November 2018)
TP ICAP: Acquisition of Axiom Group (November 2018)
Interactive Investor: Acquisition of Alliance Trust Savings (October 2018)
Natixis: Acquisition of 5% of Oddo BHF (June 2018)
Scale:
Alantra Partners: Acquisition of 49% of Access Capital Partners (December 2018)
AJ Bell: LSE Main Market IPO at £675 million valuation (December 2018)
Kepler Cheuvreux: Acquisition of IFE Mezzanine (November 2018)
Ifin Holding: Acquisition of 60% of 24 Investment (November 2018)
CME: Acquisition of NEX Group (November 2018)
FinnCap: Acquisition of Cavendish Corporate Finance (October 2018)
Pareto Securities: Acquisition of Aktieinvest (October 2018)
MainFirst Bank: Acquisition of Raymond: James’ European equities institutional brokerage business (October 2018)
DIF Broker: Acquisition of Optimize Partners (October 2018)
Mounting pressure:
"Challenger" competition:
Bitcoin Group: Acquisition of Tremmel Wertpapierhandelsbank (November 2018)
Trading 212: Launch of unlimited commissionfree share trading in UK and Germany (September 2018)
You Invest: Launch of low-cost digital trading platform by J.P. Morgan(August 2018)
Revolut: Launch of commission-freeshare trading service(June 2018)
Activist pressure:
Cenkos/Crystal Amber: Pressure to explore sale options (July 2018)
