The COVID-19 pandemic was in many ways like hitting a giant reset button on our business and personal lives. Financial institutions, as with most industries, had to rapidly adapt to ensure business continuity, stabilize operations, and provide uninterrupted customer services

The initial slowdown from the pandemic with changes to ‘the ways of working’ had a significant impact on business-as-usual to be sure. But all told, the pandemic has been relatively less disruptive to financial services companies than was expected.

Many of the macro-economic themes and headwinds facing the industry were already in place pre-pandemic and have remained largely consistent over the last decade. In fact, much of what is happening today in financial services is being driven not by the pandemic alone but by long-term trends such as slowing global economic growth and lower interest rates, the effects of which have been exacerbated by the pandemic. 

As a result, in some instances strategies haven’t changed significantly, the pandemic has served to accelerate strategic actions that were already being implemented or contemplated, just faster than anticipated.

For many financial services companies the past year has been a time to rethink their strategies and how they will succeed in a new reality that continues to be re-defined. For many, this means transforming their business models (into adjacent markets and diversifying revenue streams), modernizing their operating models (digitization), enhancing customer engagement, and gaining access to innovative capabilities. 

Major players in financial services are re-evaluating their portfolio of businesses, focusing on their core businesses for the future, and considering how best to right size their operations for future growth. They are looking to acquire new capabilities, gain access to innovative technologies and new distribution channels so they can expand their market reach and engage better with customers. 

In the insurance sector, companies are focused on de-risking their balance sheets of capital-intensive product lines and exiting sub-optimal lines of businesses to redeploy capital towards acquisitions of capital-light businesses with potential to expand scale, market penetration and product offerings. 

Implementing a resilient M&A strategy

A resilient, agile M&A strategy is more critical today to respond to the challenges of this dynamic environment.

With the initial uncertainties following the COVID-19 outbreak, deal-making across the sectors declined significantly. What perhaps was surprising was how quickly M&A markets adapted to the changing environment with activity recovered to near pre-COVID levels by the end of 2020.

Digital transformation continues to be a key driver of investment and deal activity, with developments in fintech and insurtech.

Looking forward, many insurers we speak with expect a high level of deal activity over the next one to three years as companies reevaluate their business portfolios, initiate carve-outs, separations and divestitures, and redeploy their capital for future growth. The dynamic is somewhat different in the banking sector. While, large banks are more likely to be focusing on a national strategy to strengthen their presence in their core domestic market. In contrast, large insurers and asset management companies continue to pursue strategies to diversify risks and earnings, however with measured skepticism around cross-border transactions in the current global geo-political environment.

Digital transformation continues to be a key driver of investment and deal activity, with developments in fintech and insurtech.

The past five years has witnessed the accelerated global evolution and proliferation of fintech and insurtech companies. While the US dominated the marketplace earlier in the last decade, there is now more of a global marketplace of innovation with new fintech and insurtech companies emerging. 

It was generally assumed that as new technology players gained scale and size, they would be gobbled up by incumbent financial services companies. But that hasn’t been the case. Today, maturing fintechs and insurtechs are exploring M&A and IPO opportunities. They are leveraging their innovative capabilities to gain access to new markets and customers, as well as exploring vertical integration opportunities, and possibly acquiring smaller tech players to expand their capabilities to further evolve into full-stack financial services companies.

Despite continued uncertainty and shifting cross-currents, it’s clear that deal making will be key to the strategy of financial industry participants of all stripes. 

Building a resilient M&A strategy

What does it take to build a resilient M&A strategy in today’s rapidly changing environment? We see three important elements to start:

  1. Evaluate your business portfolios. Determine what is core, and what may be non-core in the new reality, with the objective of releasing capital that can be redeployed to drive future growth;
  2. Assess where you can best right-size your business and operating model, whether by carving out and separating, or divesting underperforming, capital-intensive, and / or non-core business segments;
  3. Identify what the business needs to become more digitally capable. What are the emerging technologies, capabilities and distribution channels needed to be more relevant in the future and keep pace with changing demographics and consumer behaviors.
This article is featured in Frontiers in Finance – Resilient and relevant

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To be resilient in the current environment, it pays to be cautiously aggressive. This goes for buyers as well as sellers. Buyers are understandably extremely vigilant about what they are acquiring and if it is aligned with their refocused business strategy. 

At the end of the day, execution is everything, so like all aspects of their operating model, companies are taking a hard look at their M&A execution playbook to ensure it is fit for purpose in this new environment. Where transactions are culled from larger parent organizations there can be higher execution risk than an outright legal entity sale, as it typically entails separating the business from the parent, that the buyer then must integrate into their business. In the case of acquiring a fintech or insurtech business, there are fundamental decisions to make about whether or not the acquired business is integrated or left to operate on a standalone basis, and then, how is it strategically aligned to maximize the value of the acquisition.

With greater strategic emphasis on deal evaluation, execution and value realization in the current environment, we are seeing greater involvement of CFOs and other C-suite executives even in the preliminary stages of a transaction. This engagement of key leaders, who might in the past have left deal evaluation and execution to their skilled M&A team and functional business managers, is actually increasing the focus on identifying value creation opportunities much earlier in the deal process.

M&A strategies will continue to be redefined as economies slowly rebound from the pandemic. But in reality, the M&A market in financial services hadn’t really stopped humming.