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.
- 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.
- 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.
- 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.
- 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.
- 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.
Timeline: India takes unicorn leap with six in five days
We chart an historic week in India’s tech industry, where in just five days, between 5-9 April 2021, the country achieved six new unicorns, bringing India’s total to 10 in 2021 to date, an immense unicorn leap from just seven in 2020 and six in 2019.
April 5: Meesho
India’s first social commerce unicorn, Meesho raised US$300m from SoftBank, Facebook and Shunwei Capital, giving the Bangalore-based startup a US$2.1bn valuation, a threefold jump from its previous funding round in 2019. Founded in 2015 by two IIT-Delhi graduates, Meesho connects producers and resellers, helping small businesses sell through social media. It has 45m customers and has enabled 13m entrepreneurs to start their online businesses with no investment.
April 6: CRED
Founded just over two years ago, Bangalore-based credit card repayment app CRED raised US$215m from Falcon Edge Capital and Coatue, nearly trebling its valuation to US$2.2bn from its January US$80m round. Allowing customers to pay off their credit card debt while earning CRED coins which they cash in for rewards, CRED has grown rapidly during COVID-19, doubling its customer base to nearly 6 million in a year.
April 7: API Holdings / Groww
The first epharmacy startup to gain unicorn status, PharmEasy (API Holdings), which has digitised 60,000 brick and mortar pharmacies and 400 doctors across India, raised US$350m in a round led by Prosus Ventures. Founded by four former Flipkart employees as a way of making investing simple, investment platform Groww became India’s second-youngest fintech unicorn, raising US$83m in Series D funding led by Tiger Global, quadrupling its previous round in September.
April 8: ShareChat
New Delhi-grown social media startup ShareChat, founded in 2016 by Mohalla Tech raised US$502m from Lightspeed Ventures, Tiger Global, Twitter and Snap taking its raised total over six rounds to US$766m and pushing its valuation to US$2.1bn. The funding will be used to grow its user base and short video platform Moj, which launched in 2020 following TikTok’s ban in India. The regional language startup claims 280m users.
April 9: Gupshup
AI-led conversational message startup joined the unicorn club after raising US$100m from Tiger Global giving it a ten-fold valuation of US$1.4bn. The smart messaging platform, which has seen accelerated growth during the pandemic, was founded in Bangalore in 2005 by serial entrepreneur Beerud Sheth, whose online freelancing platform Elance is now listed. Gupshup’s API enables 100,000+ businesses to build messaging and conversation experiences across 30+ communication channels.