5 M&A forecasts for financial services in 2021

By many indications, the next six to 12 months could be busy ones for mergers and acquisitions. That’s according to PwC’s Global M&A Industry Trends report. 

This follows a turbulent year in deal-making with acceleration of activity in the second half of 2020 when deal-making rebounded in June and subsequently remained strong thorugh to year-end across all regions. In fact, in Q4 2020, both deal volumes and values were up by 2% and 18%, respectively, from 2019, and across APAC, EMEA and the Americas, M&A activity increased 17-20% in the second half of 2020. 

In particular, Asia Pacific witnessed a 15% increase as its total deal value went from US$758 billion in 2019 to US$871.5 billion.

Not just that, but there was a significant increase in the number of megadeals, those in excess of US$5 billion, totalling 57 in quarters three and four.  

Post-pandemic environment ripe for deal-making

This isn’t the only sign that 2021 will deliver on the deal-making front. According to PwC, all the ingredients, including macroeconomic factors, for increased M&A activity are all there.

Companies anticipating economic fallout from the pandemic have an “accumulated war chest of more than US$7.6 trillion in cash and marketable securities” and interest rates remain at record lows. 

Those firms facing imminent distress, consolidation may be inevitable, while for others, deal-making may be the best, and fastest, way to fill urgent gaps in the skills, resources and technologies they need to create value down the road.

When it comes to M&A trends, PwC predicts a year of deal-making likely to be marked by growing polarisation in asset valuations, as well as an acceleration of deals in digital and technology, and increasing attention to environmental, social and governance (ESG) matters.

"COVID-19 gave companies a rare glimpse into their future, and many did not like what they saw. An acceleration of digitalisation and transformation of their businesses instantly became a top priority, with M&A the fastest way to make that happen — creating a highly competitive landscape for the right deals," says Brian Levy, PwC's Global Deals Industries Leader, Partner, PwC US.

M&A Forecast: Financial Services

According to PwC, these are the expectations of deal-making in the financial services sector this year.

1. Low interest rates, regulatory measures, digitalisation, the move towards alternative providers and platforms, and the increasing economic impact of COVID-19 will lead to higher levels of M&A activity in the financial services industry in 2021. Financial services corporates that are able to leverage the situation to strengthen their market position will experience a positive impact, while those that need to react, or even restructure their operations, will suffer a negative effect.
2. In the banking sector, we expect deal activity to gain further momentum as banks, suffering from the economic mpact of COVID-19, take measures to strengthen their balance sheets and focus on optimising capital ratios through steps such as disposing of non-core businesses or distressed assets, portfolios and business segments. Many buy-side opportunities also exist, with strategic investors such as banks and other financial institutions seeking strategic and opportunistic mergers and acquisitions and well-funded private equity investors constantly searching for investments.
3. Structural profitability pressure will drive consolidation of a highly fragmented financial services industry. Banks, insurance companies and asset managers will continue to seek yield in a challenging low interest rate environment, focusing on M&A opportunities to achieve scale or to further develop their business models. Fintech companies will continue to attract investors, either to support digitalisation as part of a business-model transformation or as portfolio companies for corporate venture capital funds.
4. Ongoing consolidation in the asset management sector will likely accelerate as companies seek economies of scale to stabilise profitability. The transparency and pressure on fees and margins will lead not only to internal optimisation measures with a focus on reducing costs, but also to external solutions such as takeovers and mergers. Such deals, with the cooperation of both strategic and private equity investors, aim to make operating platforms more accessible and efficient. We expect investors will be attracted to new technologies such as robo-advice and algorithm-based investment advice. We also expect investors to increase their allocations to certain asset classes, such as alternative investments, infrastructure funds and ESG-focused funds.
5. The wealth management sector, by contrast, is more consolidated. Along with more stable ownership, this suggests the sector will experience less M&A activity on an international level in 2021.