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In the first half of 2020, the FS deal environment saw a steep decline of 11.5 percent in deal volume compared to 1H19, owing to a global economic slowdown triggered by COVID-19. It’s no surprise that M&A volumes have plummeted across all sub-sectors globally as investors reassess deals and financial institutions focus on loan management, capital preservation, and the financial wellbeing of their own organizations. Some later-stage acquisitions and divestitures were completed during the period, while others were put on hold or cancelled due to high volatility in financial markets and uncertainty over business resilience. Overall, global deal value levels plunged by 26.6 percent year-over-year in 1H20, mostly in the banking and investment management sectors. Insurance deal value was lifted with one mega transaction (greater than US$25bn) in Europe.

Amidst market gloom, a v-shaped economic recovery appears unattainable, yet there are signs of light. Resilience of well capitalized financial institutions, the announcement of a few niche high-value deals, the drive for operational efficiency and business continuity management, and the need for digital customer relationships and agile commercial models have all contributed to the emergence of several M&A hotspots.

Key highlights from the report include the following:

Still making the rounds:

Despite a decline of 31.2 percent in average deal size, 1H20 saw a few mega deals (greater than US$15bn), mainly in the core banking and insurance sectors. The proposed acquisition of Samba Financial Group SJSC by National ... Commercial Bank SJSC for US$15.6bn (banking) and the proposed merger of Willis Towers Watson PLC with Aon PLC for US$30.1bn (insurance) were two notable transactions.

Global cross-border deals represented 23 percent of the total FS deal volume in H1 2020:

Cross-border deals saw a dip of 9.5 percent compared to 1H19, with major deal flow seen from North America (especially the US) to ...Western Europe (especially the UK and Spain) and to ASPAC (Australia and India).

Significant number of FS potential opportunities available across various markets, mainly in the US, Italy, Australia, India and Indonesia

Passive banking transaction market may pave way for global domestic consolidation:

Banking deal volume toppled, with the largest transaction market (the US) hit hard as banks cancelled big ticket deals and shifted their ...focus to credit quality issues. EMEA saw a surge in deal value owing to two high-value transactions (>US$10 bn). India and China surfaced as the busiest markets in ASPAC. Distressed sale of weaker non-banking finance companies, confidence capital raise in banks, strategic investments by PE in weaker banks were key drivers in India while the local banks in China continued to focus on strengthening their capital position via IPOs as well as attracting new investors through direct investments. Payments did not see any mega deals (>US$10bn) in 1H20; however, B2B M&A generated some activity and global consolidation among payment service providers is now underway with some notable deals doing the rounds. A heightened need for scale and necessity to share massive investments in technology and digitalization are expected to drive domestic banking consolidation globally.

Insurance brokerage keeps sector bubbling:

The insurance sector experienced a mild decline in deal volume but a massive increase in value owing to one European insurance mega deal. Insurance brokerage and insurtech surfaced ... as hot targets for acquirers globally. Deal activity in the Americas was mainly fueled by sector consolidation while an increase in cross-border M&A in the US was propelled by bidders from Bermuda and Japan. In Europe, life insurance, retail insurance brokerage, and bancassurance agreements were key regional targets. Life insurance and regional distribution deals along with growing interest from foreign investors to buy stakes in Asian companies kept the ASPAC deal market resilient. Moreover, the global run-off market is heating up, especially for non-life insurance assets. With COVID-19, the capital base of insurers has been adversely impacted thereby providing further impetus to exit aging liabilities.

Desire for scale fosters further consolidation in investment management:

Asset managers are experiencing costs pressures due in part to increased regulation — a trend that has negatively impacted profit margins. ...Investor preference for passive investments, institutional investor preference to deal with fewer firms and limited organic growth opportunities continued to drive consolidation in the industry, especially amongst small and medium size asset managers. In the US, the acquisition of RIA firms catalyzed M&A activity. Europe saw smaller deals involving mergers and partnerships, along with an increased focus on ESG investing. In ASPAC, China, Australia and South Korea were the busiest markets.

No end in sight for private equity players:

OVID-19 compelled PE players, who enjoy healthy liquidity, to first assess their portfolio companies and then seek targets. Globally today, the payments sector is one of the most attractive ... segments for such buyers. PE firms in the US turned to investments such as add-ons, PIPEs, carve outs, and distressed-for-control transactions, while European PE firms stepped up to rescue the troubled companies they own by providing emergency loans or buying back debt. Potential targets such as non-banking financial institutions, insurance brokerage, troubled/weaker banks, payments, lease finance, non-performing loans (NPLs), mutual fund businesses and index businesses continue to garner PE interest in ASPAC.

In 2H20, global financial institutions may temporarily put M&A on hold, waiting for a clearer picture on global economic scenarios and the anticipated development of a COVID-19 vaccine. From then on, M&A activity will likely be driven by accelerated global consolidation within the banking and asset management sectors, an increase in rescue and restructuring  deals, new NPL transaction markets, distressed asset opportunities, an attractive insurtech market, digital solutions and acquisitions of challenged fintech players by traditional  incumbents — especially those with high burn-rates and low revenue levels.

As the initial wave of COVID-19 crests in many major economies, specialized investors are looking for opportunities in less impacted sectors. Strategic investors and private equity firms are showing an opportunistic approach to acquisitions — with a keen eye to mid-sized firms requiring access to liquidity and capital.

Giuseppe Rossano Latorre
Partner, KPMG Advisory, Corporate Finance
KPMG in Italy