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Government involvement “drastically reshapes financial services M&A”

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The financial crisis had a profound impact on patterns of M&A in financial services across Europe during 2008, reversing many well-established trends in deal activity, according to

The financial crisis had a profound impact on patterns of M&A in financial services across Europe during 2008, reversing many well-established trends in deal activity, according to a report from PricewaterhouseCoopers.

The report found that some of the most notable changes include a steep fall in the value of M&A involving private sector bidders, a shift away from the emerging markets to domestic priorities, and a renewed focus on stability and solvency at the expense of top-line growth. 

It also found that 61 per cent of respondents to the PwC survey indicated that, with regards to banks, government involvement would constrain M&A activity during 2009. 

Nick Page, a partner at PricewaterhouseCoopers, says: ‘Deal dynamics have changed tremendously and are now dominated by haste, opportunism and government involvement, the latter of which has dramatically changed the dynamic of European M&A activity, most markedly in terms of the types of transactions that have taken place. Deals are no longer dominated by the desire for increased scale, faster growth, reaching new markets and creating national champions.’ 

2008 was ‘year zero’ for financial services M&A, with levels of activity dropping across Europe, the report says.

The total value of deals in the European financial services sector declined from EUR208bn 2007 to EUR179bn 2008.

The growing trend of governments nationalising or taking strategic stakes in European financial services companies accounted for over 50 per cent (12) of the top 20 deals and if state sponsored activity is excluded, total deal values during 2008 decreased by 65 per cent. 

During 2008, government involvement reversed the trend of increasing cross border activity toward domestic deal making. Domestic deals accounted for EUR137bn of total deal activity in 2008, up 81 per cent from EUR76bn in 2007.

In 2008 cross border deals accounted for EUR41bn, down 69 per cent from EUR132bn in 2007.

PwC says the impact of this has been particularly felt in Eastern Europe and levels of activity have cooled from EUR11bn in 2007 to EUR6bn in 2008. 

M&A deal activity was heavily biased toward banking in 2008 with deal values rising from EUR140bn in 2007 to EUR152bn in 2008. Government involvement accounted for a huge EUR104bn of this total, the significant factor allowing the banking sector to retain its dominance.

The report found that the value of transactions involving insurers and asset managers dropped sharply. Insurance saw a decline from EUR45bn in 2007 to EUR11bn in 2008, while asset management saw a fall from EUR13bn in 2007 to EUR5bn in 2008.

Page says: ‘The financial crisis will continue to dominate the prospects for M&A in European financial services through 2009. The potential effects of regulatory activity and government intervention are contributing to uncertainty in the deal making environment which will having a lasting effect on deal activity well into 2010.’ 

The survey found that 56 per cent of respondents anticipate M&A appetite to remain at the same level or decrease through 2009, in part, a reflection of the increased trend of government ownership of banks. 

The extent of government involvement is anticipated to be a catalyst for some significant strategic reprioritisation in the industry with the mantra for 2009 likely to be restructuring.

Divestments and disposals were the driving forces behind many transactions during 2008 and this is set to continue through the year with 87 per cent of respondents believing that financial institutions will be more likely to divest assets, portfolios, businesses and subsidiaries in 2009, than be buyers of new business. 

A further 66 per cent of respondents expect the dramatic fall of share prices of banks and financial services companies will lead to greater involvement of sovereign wealth funds and private equity as investors in the financial services sector during 2009.

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