Financial Services

Financial Services M&A Outlook 2010

With so many national banks in trouble and/or failing to actually recover, mergers & acquisitions (M&A) activity in the financial services (FS) industry will focus on consolidation among regional banks, either by the FDIC or by the banks themselves. The asset management sector should continue to remain popular for M&A transactions.

The FS industry has experienced many changes from the concentration on M&A to achieve economies of scale and to exploit new technologies and deregulation. For many banks, this type of rationale simply no longer will work as a way to save in systems and development costs. Instead, larger banks will focus on increasing earnings through enhanced value propositions. Point in fact, Q1 2010 already saw Bank of America doing away with overdraft fees for debit accounts, an important value, not to mention point of differentiation, as new regulations require individuals to formally “opt into” overdraft protection. Look for many larger banks to develop this type of value proposition in a bid to lure consumers away from smaller banks and non-banks that have flourished since the banking crises.

On the flip side, look for smaller banks and non-banks to begin merging to fend off acquisition and better their value proposition to the consumer, such as in the case of more locations, more ATMs, etc. Since these types of mergers started, and private-equity groups, broker-dealers, non-bank finance companies and hedge funds have begun to get into the game, investment and commercial banks have migrated from a local to regional, national or even global system. But in doing so, these mergers create unique risks and buying opportunities.

Look for most M&A activity in the FS industry to center on smaller, regional chain banks and non-banks as they pull together to weather the storm.

SOURCES: Deloitte; PriceWaterhouseCoopers; McKinsey Quarterly; KPMG