European Financial Services M&A Insight February 2010 · Aug Friends Provident Plc United Kingdom...

Financial services

European Financial ServicesM&A InsightFebruary 2010

02 Welcome

03 Data Analysis: Restructuring is well underway

08 British Banks: Back in the sights of foreign investors?

12 Waking up to new realities: The impact of Solvency II onstrategy and M&A activity in the insurance industry

15 Looking Ahead: We predict increasing privatesector activity

European Financial Services M&A Insight

Welcometo the first edition of European Financial Services M&A Insight for 2010

This quarterly report aims toprovide perspectives on therecent trends and futuredevelopments in the M&Amarket, including analysis of thelatest transactions and insightsinto emerging investmentopportunities.

M&A activity continued to be relativelylight in the second half of 2009, thougha number of interesting themes areemerging, which are likely to set thescene for 2010. As we anticipated in theprevious edition of Insight, divestment ofasset management and consumerfinance subsidiaries by universal bankscontinues to gather pace. We are alsoseeing the increasing use of jointventures as institutions look for lesscostly and strategically less riskyalternatives to acquisition. (See ‘DataAnalysis – restructuring is wellunderway’.)

We believe that British banking is likelyto be a key focus of activity, particularlyfor foreign financial services institutionsand especially now that a number ofleading groups are to be required todivest a significant proportion of theiroperations to meet EU competitionrules. (See ‘British Banks – back in thesights of foreign investors?’.)

The move to Solvency II will force manyinsurers to re-assess capital efficiency,risk diversification and organisational

structures, the results of which willprovide a powerful spur for bothdivestment and consolidation. (See‘Waking up to new realities – The impactof Solvency II on strategy and M&Aactivity in the insurance industry’.)

PricewaterhouseCoopers1 has justcompleted an online survey of theprospects for M&A, which attractedresponses from more than 200participants from financial servicesinstitutions across Europe. The resultspoint to a pick up in the number of majortransactions, with nearly three-quartersof respondents expecting large dealactivity to increase over the coming year.However, when asked whether M&A canreturn to the same levels seen in 2006and 2007 over the next three years, justover half (52%) said no, although asignificant proportion (40%) said yes.(See ‘Looking Ahead – we predictincreasing private sector activity’.)

We hope that you enjoy this edition ofInsight. Please do not hesitate to contacteither of us or any of the article authors ifyou have any comments or queries.

2 PricewaterhouseCoopers

Fredrik JohanssonPricewaterhouseCoopers (UK)[email protected]

Nick PagePricewaterhouseCoopers (UK)[email protected]

Front cover image: The Pont Alexandre III, Paris.

1 ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopersLLP (a limited liability partnership in the United Kingdom) or,as the context requires, the PricewaterhouseCoopers globalnetwork or other member firms of the network, each ofwhich is a separate legal entity.


Data Analysis Restructuring is well underway

Following on from the October2009 edition of this paper, whichanalysed deal activity during thefirst half of 2009, this editionwas intended to focus on thesecond half of the year. However,a considerable amount of furthertransaction data for the first halfhas become public since theOctober edition. This analysistherefore reviews deal activity forthe whole of 2009.2

Overall, 2009 saw a steep decline in financial services deal-making. Deals involvingbanking targets declined particularly quickly and, excluding government activity,fell to the lowest level seen in the seven years of this publication (see Figure 1aand 1b). Insurance deals remained at a comparable level to 2008, while assetmanagement deal values received a strong boost from one very large transaction.

In total, financial services deals for which values were disclosed amounted to €80bn,compared to €178bn in 2008 and €208bn in 2007. With government activity excludedhowever, 2009’s total deal value was only €41bn, lower than the €45bn reported in2004 (see Figure 2). The slowdown accelerated in the second half, with total dealvalue falling to €26bn from €54bn in the first half of the year.

PricewaterhouseCoopers 3

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Other Asset management Insurance Banking

■ 2003 ■ 2004 ■ 2005 ■ 2006 ■ 2007 ■ 2008 ■ 2009 ■ 2009 excl govt

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Figure 1a: Trend of European FS deal value by sector (€ billion)

Source: PricewaterhouseCoopers analysis of mergermarket, Reuters and Dealogic data

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Figure 2: European FS deals by value (€ billion)


2 The source data on the deals analysed in this publicationcome from mergermarket, Reuters and Dealogic, unlessotherwise specified.

Figure 1b: 2009 European FS deal value by sector (€ billion)


■ Banking ■ Asset Management■ Insurance ■ Other

1512

49


Data Analysiscontinued...

Despite the absolute decline in thevalue of transactions, private sectordeals accounted for a growingproportion of the total. Government-ledtransactions declined to 24% of totaldeal value in the second half of the year,compared with 58% for the first half, andcross-border activity as a proportion ofprivate sector deals increased to 65%from 41% in 2008.

The largest deals of 2009 weredriven by a number of factors

The varied drivers of financial servicestransactions in 2009 mean that it is worthreviewing the year’s major deals on aquarterly basis (see Figure 3a and 3b):

• Government activity overshadowedthe first quarter. Key transactionswere the recapitalisations ofCommerzbank for €10bn, Royal Bankof Scotland (RBS) for €5.9bn andLloyds Banking Group for €4.5bn; thenationalisation of Anglo Irish Bank for€3.8bn; and a €3bn capital injectioninto HSH Nordbank.

• The second quarter was dominatedby Barclays’ sale of Barclays GlobalInvestors (BGI) to BlackRock for

€9.7bn. As discussed in the lastedition of Insight, this deal was oneof the largest asset managementtransactions in history and was thelargest private sector deal of 2009.Separately, the German governmenttook control of Hypo Real Estate at acost of €3.3bn.

• The third quarter saw Resolution buyFriends Provident for €2.2bn, 2009’slargest insurance transaction.This interesting deal sees a large,established financial institutionacquired by an explicitlyconsolidation-focused company.In July, the French state took a 20%stake in mutual banking giant BanquePopulaire Caisse d’Epargne for €3bn,formed in June 2009, to strengthenthe group’s capital position.

• A variety of deals were announced inthe final quarter. Germany took a 49%stake in WestLB for €3bn; State Streetacquired Intesa Sanpaolo’s securitiesservices units for €1.8bn; Avivafloated 38% of Delta Lloyd on theAmsterdam Stock Exchange, raising€1.1bn; and JP Morgan bought out itsjoint venture with UK brokerCazenove for €1.1bn.


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Commerzbank AG €10bnRBS €5.9bnLBG €4.5bnAnglo Irish Bank €3.8bn

Q4Q3Q2Q1

BGI €9.7bnHypo Real Estate €3.3bnLeasePlan Corporation €1.3bn

BPCE €3bnFriends Provident €2.2bnParis RE €1.4bn

WestLB AG €3bnIntesa Sanpaolo Servizi €1.8bnDelta Lloyd Groep €1.1bnJPMorgan Cazenove €1.1bn

Figure 3a: 2009 European FS deals by value (€ billion)




Figure 3b: Top 20 Deals 2009

Month Target company Target country Bidder company Bidder country Deal value (€m)

Jan Commerzbank AG (25.0001%) Germany Government of Germany 9,970Germany

Jun Barclays Global Investors United Kingdom BlackRock Inc USA 9,678

Jan Royal Bank of Scotland United Kingdom HM Treasury United Kingdom 5,884Group Plc (29.79% stake)

Mar Lloyds Banking Group Plc United Kingdom HM Treasury United Kingdom 4,455(21.60% stake)

Jan Anglo Irish Bank Corporation Ireland (Republic) Irish Ministry of Ireland (Republic) 3,827Limited Finance

Apr Hypo Real Estate Holding AG Germany Government of Germany 3,302(91.35% stake) Germany

Feb HSH Nordbank AG (25.99%) Germany Government of Germany 3,000Germany

Jul BPCE SA (20%) France Government of France France 3,000

Nov WestLB AG (49%) Germany Government of Germany 3,000Germany

Aug Friends Provident Plc United Kingdom Resolution Limited United Kingdom 2,164

Jan KBC Group NV Belgium Government of the Belgium 2,000(Undisclosed economic interest) Flemish Region

Feb Alleanza Assicurazioni SpA Italy Assicurazioni Generali Italy 1,805(49.60% stake) SpA

Dec Intesa Sanpaolo Servizi Italy State Street USA 1,750Transazionali SpA Sanpaolo CorporationBank SA

Jan Societe Generale asset France CAAM France 1,620management business

Jul Paris RE Switzerland PartnerRe Ltd Bermuda 1,435

May LeasePlan Corporation NV Netherlands Fleet Investments BV Netherlands 1,300(50.00% stake)

Nov Delta Lloyd Groep (38.4%) Netherlands 1,120

Nov JPMorgan Cazenove United Kingdom JPMorgan Chase & Co USA 1,119(49.99% stake)

Oct Sal. Oppenheim jr & Cie SCA Luxembourg Deutsche Bank AG Germany 1,000

Sept Genesis Lease Limited Bermuda* AerCap Holdings N.V. Netherlands 890

Sub-total 62,320

Other 17,761

Grand total 80,081

* GLS is headquartered in Republic of Ireland.

Source: PricewaterhouseCoopers analysis of mergermarket, Thomsons and Dealogic information


Data Analysiscontinued...


A review of smaller deals revealssome interesting trends

Looking beyond 2009’s headlinetransactions, analysis of the year’ssmaller and medium-sized deals revealssome interesting observations. Inparticular, we highlight the followingthemes, several of which werediscussed in previous editions of Insight.

Use of joint ventures and otheralliances. Joint ventures flourishedduring the year, particularly in France(see box below).

Acquisitions in asset managementand private banking. As predicted inthe last edition of Insight, M&A activity inasset management increased during the

second half of 2009. Several institutionsmade bolt-on acquisitions, often as aresult of universal banks’ disposals.Notable deals announced during thesecond half of the year included theacquisition of Sal. Oppenheim byDeutsche Bank for €1bn, Julius Baer’spurchase of ING Bank Switzerland for€344m and BNY Mellon’s acquisition ofInsight Investment Management fromLloyds Banking Group for €273m.

Divestment of non-core bankingsubsidiaries. European banking sawseveral divestments outside the wealthmanagement arena. The largest wasDeutsche Bank’s acquisition of ABNAMRO’s former commercial bankingbusinesses for €700m, after a protractedsale process that began when RBS and

Joint Ventures: Isolated transactions orthe start of a trend?2009 saw the formation of several large joint ventures (JVs) between bankinggroups, most noticeably in the French market:

• Consumer credit JV between La Banque Postale and Société Générale

• Asset management JV between Crédit Agricole and Société Générale

• Online banking JV between Société Générale and La Caixa

These JVs reflect different strategies:

• Banks keeping control over activities seen as important to customers,while benefiting from economies of scale and wider distribution networks;

• An alternative exit route to potentially lower realisation values, achieved inthe financial services market during 2009.

Despite the creation of large pan-European retail banking groups in recentyears, JVs are typically set up on a domestic basis, due to national differencesin regulation, taxation and customer behaviour.

The Société Générale/La Caixa JV is an example of a less common cross-border JV. We believe partnerships across national borders may becomeincreasingly common in certain segments of the financial services industry.


Fortis received government support in2008. There were several consumerfinance deals: BNP Paribas acquired25% in Findomestic from IntesaSanpaolo, with an option for a further25%; Barclays bought Citigroup’sPortuguese consumer credit units; andSantander purchased AIG Bank’s Polishconsumer business.

Consolidation in insurance. In additionto Resolution’s acquisition of FriendsProvident, Criteria CaixaCorp of Spainacquired health insurer Compania deSeguros Adeslas in two tranches, for a total consideration of €1.2bn. Danishinsurer TrygVesta pursued its Nordicconsolidation strategy, buying ModernaForsakringar’s non-life businesses for€109m. In Portugal, Rentipar acquired

two local insurance firms from CNPAssurances, and Spanish insurer CASERpurchased 50% of Caixanova Vida fromits parent bank. (See ‘Waking up to newrealities – The impact of Solvency II onstrategy and M&A activity in theinsurance industry’).

Mutual savings bank mergers.Two large French mutual banks mergedto form Banque Populaire Caissed’Epargne. No value was disclosed,but a €3bn capital injection by the French state implied a combinedvalue of €15bn. Other deals withundisclosed values included the mergerof mutual Yorkshire Building Societywith rival Chelsea Building Society, theacquisition of Britannia Building Societyby Cooperative Financial Services, the

merger of Spanish savings banks CaixaSabadell, Caixa Terrassa and CaixaManlleu and the acquisition of SwedishSparbanken Finn by domestic rivalSparbanken Gripen.



British Banks Back in the sights of foreign investors?

With Britain’s banking sectorstabilising, its growth prospectsimproving and EU competitionrulings set to bring moreacquisition targets onto themarket, should now be the timefor foreign players to take a freshlook at the UK?

‘The UK is at the heart of Santander’ssuccess,’ said executives at the Spanishgroup in a presentation to analysts inSeptember 2009.3 Since acquiringAbbey in 2004 and then Alliance &Leicester and the savings arm ofBradford & Bingley in the wake of thefinancial crisis,4 Santander has provideda model for incoming institutions lookingto establish a strong presence in the UK.Santander UK is now the country’ssecond largest mortgage provider(market share 13%) and third largestdeposit taker (market share 10%).3

A combination of strategic clarity, strictcost management and determinedoperational rationalisation has enabledSantander UK to sustain profitability inthe face of the earnings pressures seenelsewhere in Britain’s retail bankingsector.

Banks or other financial servicesinstitutions looking to follow Santander’slead in the UK will find a market that has

begun to turn the corner, following theturmoil and ensuing recessionprecipitated by the financial crisis. InDecember 2009, the Bank of Englandreported that the financial system hasbecome ‘significantly more stable overthe past six months’.5 The UKgovernment’s injection of liquidity andtakeover of some troubled institutionsclearly played a crucial role in pulling thesector back from the brink of collapse.However, the past year has also beenmarked by steadily improving riskprofiles as banks focus on securedlending and more effective credit control.

In September 2009, the quarterlyPwC/CBI financial services surveyrevealed the first upswing in bankingbusiness volumes and confidence fornearly two years,6 with this positivesentiment sustained in the Decembersurvey7 (see Figure 1). With theavailability of both corporate andconsumer credit still restricted,


Nick PagePricewaterhouseCoopers (UK)[email protected]

Shaun McNameePricewaterhouseCoopers (UK)[email protected]

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Figure 1: Optimism about overall business situation – Key sectors

Source: CBI/PricewaterhouseCoopers Financial Services survey, December 2009

3 Grupo Santander presentation to analysts in Madrid, 17.09.09

4 Abbey, Alliance & Leicester and Bradford & Bingley are to be fully integrated into the Santander brand over the course of 2010(www.santander.co.uk)

5 Bank of England Financial Stability Report, December 2009

6 PricewaterhouseCoopers/Confederation of British Industry quarterly financial services survey, September 2009(www.pwc.com/financialservices)

7 PricewaterhouseCoopers/Confederation of British Industry quarterly financial services survey, December 2009(www.pwc.com/financialservices)


institutions have benefited from theopportunity to charge higher fees and bemore selective in their lending. Lookingahead, data from the InternationalMonetary Fund indicates that demandfor credit from consumers is likely toreturn faster than lending capacity (seeFigure 2). With banks no longer able torely on wholesale funding, they will needto increase their deposit base to meetcredit demand.

The increasing optimism within thebanking sector also reflects the gradualupturn in business output and demand.Although the UK took longer to climb outof recession than Germany or France,and the recovery remains fragile,PricewaterhouseCoopers’ economicsunit predicts that real GDP growth in theUK will come back to more than 2% perannum by 2012, ahead of its maincontinental counterparts (France 1.8% in2012 and Germany 1.5% in 2012).8

The good news is tempered by theincreasing weight of regulation andgovernment scrutiny, which mayintensify still further as the managementof the economy and financial system

take centre stage in this year’s election.The UK’s banking sector also facescontinuing impairment charges andlingering uncertainty over the extent ofthe losses still to come, the risks ofwhich will need to be factored into anyacquisition assessment. It may takeseveral years of deleveraging beforedebt ratios within the banking sectorcome down to sustainable levels.Despite greater consumer caution,personal debt also remains especiallyhigh by international standards(an average of around £60,000 perhousehold).9 On the corporate side,repayment difficulties have led toextensive demand for independentbusiness reviews* and debt workoutarrangements, though the proportion ofcorporate loans being written off (lessthan 1% in 2009) is some way below the2% or more experienced during the UKrecession of the early 1990s.10

Weakness creates openings

While these difficulties will clearly be animportant consideration for potentialbuyers, they could work to the

advantage of incoming investors. As UKinstitutions concentrate on repairing theirweakened balance sheets, they will havelimited appetite for acquisition, leavingsome of the potentially most favourableopportunities to be picked up by bettercapitalised foreign players. In turn, manyBritish banks would welcome thechance to strengthen their capitalposition through the sale of non-coreassets. Commenting on the sale ofBarclays Global Investors (BGI) toBlackRock, which was announced inJune 2009 and completed in Decemberof that year, Marcus Agius, Chairman ofBarclays, said that the deal ‘will reinforceour capital position at a time whenadditional capital resources are highlyvalued by the market’.11 Despite theshare price rally in 2009, the bankingsector’s legacy issues also mean thatequity values are still subdued incomparison to their pre-crisis highs.This may put pressure on the acquisitionprices of banks, though the paucity ofrecent deals makes it difficult to judgepricing trends with any precision.

The longer term prospects for Britishbanking are positive. The UK is an openand sophisticated economy with adiverse population, considerable talentpool and substantial banking needs.Whether or not the financial crisis andthe resulting changes in regulation andlegislation weaken London’s long-termposition as a leading financial centre,banking profitability in the UK will besustained by the strong underlyingdemand for mortgages, SME lendingand other mainstays of traditionalcredit business.


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Figure 2: Bank lending capacity and credit demand growth (%)

Source: IMF, PricewaterhouseCoopers analysis

08 PricewaterhouseCoopers Economics Unit projections,October 2009

09 ‘Precious Plastic 2010’, PricewaterhouseCoopers’ reportinto the UK credit card market, published on 08.11.09(www.pwc.com/financialservices)

10 ‘Trends in Lending, December 2009’, published by the Bankof England

11 Chairman’s Statement from Barclays PLC General Meeting,06.08.09

* Independent business reviews provide an expert assessment of the financial status of an underperforming company and helpidentify options for recovery and restructuring.


British Bankscontinued...

Unprecedented choice

The other key attraction for foreigninvestors is the growing and, in manyways, unprecedented potentialavailability of acquisition opportunitieswithin UK banking. Divestment hasalready been gathering pace as groupsseek to bolster balance sheets andconcentrate resources on the corebusiness. Some of the non-coreoperations that may be put up for saleare likely to be insurers, asset managersand businesses on the fringes of thebanking industry, creating opportunitiesfor foreign players to gain a foothold orstrengthen their presence in these areas.

The availability of potential takeovertargets has been given further impetusby the announcements in November2009, that some of the groups that havereceived significant government fundingwill be required to sell off certain assets,to fall into line with EU state aid andcompetition rules12 (see Figure 3). Thisincludes Northern Rock, which has beenbroken up to make way for the sale of itsbetter performing assets13 and theLloyds Banking Group (LBG), which hasagreed to reduce its dominant shares ofthe UK mortgage and current accountmarkets. LBG’s divestment package willinclude the sale of part of its branchnetwork and its UK mortgage book.14

The other affected group is Royal Bankof Scotland (RBS), whose agreementwith the European Commission includesthe sale of some branches and otherbanking assets, along with thedivestment of its insurance division.15

RBS Insurance, which could constitute aFTSE 100 company in its own right if itwas sold as a standalone business,

presents a significant acquisitionopportunity. Also being put up for saleare RBS’ WorldPay division and thegroup’s interest in RBS SempraCommodities, both of which occupyleading positions in their respectivemarkets.15

Further investment opportunities arelikely to come from the scaling back ofoperations by some US consumer creditgroups, along with a growing interestfrom private equity groups in thepurchase of non-performing assets.Ultimately, the government will belooking for the right juncture to relinquishits considerable holdings in the bankingsector, which include outright control ormajority stakes in RBS, LBG andNorthern Rock.

Enhanced competition

The openings for foreign groups will beaugmented by the government’s desireto increase what it sees as the limitedchoice in the retail banking market.Discussing the proposals for RBS,LBG and Northern Rock in an interviewwith the BBC in November 2009, AlistairDarling, the UK Chancellor of theExchequer, said ‘we want to ensurethere is proper competition and choicein the high street as that is the best wayto make sure you have a good supplyof credit at affordable rates’.16

If it gained power, the Conservativeopposition could go further by referringthe impact on competition of recentconsolidation within the banking sectorto an enquiry by the UK Office of Fair


Figure 3: Coming on to the marketFollowing agreement with the European Commission, RBS, LBG and NorthernRock will be required to divest certain assets, which according to theCommission will ‘facilitate the entry of a new competitor or the reinforcementof a smaller existing competitor’.

The key mainstream banking assets coming on to the market include:

Northern Rock plc – a new savings and mortgage bank that will hold andservice all the group’s customer savings accounts and some existingmortgage accounts;

RBS branch network in England and Wales, the NatWest branches inScotland and Direct SME customers across the UK, which together representaround 5% of the SME and mid-tier corporate market;

Divestments from LBG will include the sale of at least 600 branches,representing just under 5% market share in the UK personal current accountmarket and 19% of the group’s mortgage book.Source: European Commission media release – 18.11.09, Northern Rock media release – 10.11.09, LBG presentation toanalysts – 03.11.09

12 European Commission media releases,18.11.09 and 14.12.09

13 Treasury media release, 10.11.09, Northern Rock media release, 04.01.10

14 LBG presentation to analysts, 03.11.09

15 RBS media release, 03.11.09

16 BBC Politics Show, 01.11.09


Trading (key deals include the 2008merger of the UK’s leading mortgageproviders LBG and HBOS). The resultscould lead to more enforced divestmentand ‘help to inform a Conservativegovernment’s strategy for disposing ofits banking shares’.17

Whichever party wins the election will bekeen to ensure that the divested assetsgo to new entrants, both from abroadand outside the mainstream bankingsector, rather than the main existingplayers, as this would increase choiceand avoid what the current Chancellordescribed, as an ‘unacceptablesituation’ in which ‘we end up with halfa dozen big providers’.18 However, someUK groups that have not received directstate aid may be lobbying behind thescenes.

Window of opportunity

Foreign groups looking to establish anddevelop their presence in the UKbanking sector are set to benefit from anauspicious combination of increasingmarket opportunity and growing targetavailability. While optimism is returning,the recovery is still tentative and it maytherefore take several years before thebanking industry reaches its full potentialonce again. However, the long-termprospects for this large and advancedsector will continue to be attractive.In one of the most open markets in theworld, foreign acquirers are, in ouropinion, likely to be welcomed by thegovernment as a way to increasecompetition and inject fresh capital.In turn, the success of Santanderhighlights the opportunity to createsignificant shareholder value in a leadingglobal financial market through effectiveacquisition and restructuring.


Editorial eyeSuch is the financial, strategicand government pressuresspurring divestment that anumber of institutions could seekto sell subsidiaries at around thesame time. What is unclear iswhether an influx of takeovertargets will drive up prices asinvestors vie to gain access to arecovering and, in the long-term,profitable market or whetherconcerns over regulation, thecurrent fragility of the economyand the condition of Britishbanks deter bidders and forceprices down.

17 ‘From crisis to confidence: Plan for sound banking’, Conservative Party policy white paper, published on 08.07.09

18 BBC Politics Show, 01.11.09


Waking up to new realitiesThe impact of Solvency II on strategy and M&A activity in theinsurance industry

While most insurers are primarilyfocusing on the technicalaspects of Solvency II, a numberof companies are now beginningto assess the far-reachingstrategic implications. With theseimplications set to provide astrong spur for M&A, what will bedriving M&A strategies and howwill the industry be able to turnthe directive to their competitiveadvantage?

With many insurers still mired in theminutiae of model development,documentation and other aspects ofSolvency II Pillar 1 implementation, it iseasy to lose sight of the bigger strategicpicture.

Strategically, the key driver for changewill be the demand for more effectiveenterprise risk management (ERM), itscloser integration into business decision-making and opening up to far greaterstakeholder scrutiny. This will have aprofound affect on the way risks areevaluated, how capital efficiency isjudged and, ultimately, how and whereinsurers choose to compete – the ‘newrealities’. Specific ramifications includepotentially higher capital charges forpolicies with volatile or uncertain riskprofiles such as guaranteed lifeproducts, long tail casualty business andlow frequency/high severity lines. Thedirective will also highlight the capitaltied up in discontinued business. Fornon-life insurers, in particular, there isthe challenge of being required to takeinvestment risks fully into account,which will make it more difficult for

companies to compensate for poorunderwriting performance by runninghigh investment risks.

More broadly, the concept of‘diversification’ will need to bere-examined and refined in the lightof Solvency II as companies look atsize, geographical reach, multi-lineoperations, non-correlation of assetsand liabilities, non-contagion, etc. As aresult, larger and genuinely diversifiedbusinesses will be able to developbalanced portfolios and resulting capitaladvantages that will not be open tosmaller and mono-line entities. On theflip side, the difficulties of oversight andcontrol created by managing complexgroup structures, conducting business inmultiple territories and divergent legalenvironments will increase operationalrisk and associated capital charges –a challenge that many insurers have yetto consider fully.

The cumulative impact of these changeswill force insurers to review theirstrategies, existing structures andproduct mix, as they look at how to


Fredrik JohanssonPricewaterhouseCoopers (UK)[email protected]

Achim BauerPricewaterhouseCoopers (UK)[email protected]


optimise capital efficiencies and developa clear articulation of their businessobjectives and the trade off between riskand reward (see Figure 1).

Impact on M&A

M&A in the insurance industry has beenrelatively restrained in the wake of thefinancial crisis. The number of sales thathave eventually been abandoned overthe past 18 months highlights theparticular challenge of how to generatebuyer appetite for acquisition of aninsurer’s non-core assets. However, webelieve that the re-think of strategicoptions emanating from Solvency II willlead to a pick-up in deal activity.The broad spectrum of transactionsis likely to include transformationaldeals through to diversification, cost-efficiency plays and highly structuredarrangements for closed books ofbusiness.

Articulating a robust strategic rationalefor how divestment or acquisition willimprove capital efficiency and

competitive relevance in the post-Solvency II environment will clearly becritical in securing shareholder andstakeholder support. The underlyingconsideration is what business model islikely to be most appropriate for aparticular company in this newenvironment and what part M&A willplay in the resulting reshaping ofthe enterprise.

We expect to see the emergence of twodistinctive paths for M&A, one which isseeking out benefits from a horizontalstrategy and one which is seeking tocapitalise on vertical integration:

Redefining diversificationOne model will be the true consolidators.Companies that are already reasonablydiversified and will therefore realisecapital advantages under Solvency II willbe able to look at how M&A couldfurther enhance the balance of theirportfolio. These acquirers will be highlyselective in seeking out targets that willenable them to bridge diversificationgaps in their product line orgeographical spread. One of the key

value metrics for their choice of whichcompany to buy will be the enhancedlevel of capital efficiency the deal willgenerate.

At the other end of the spectrum will bethe true specialists. Some companieswill not be able to secure effectivediversification and could face additionalcapital charges because of a narrowproduct or regional focus. These firmswill want to look at the adequacy ofrisk-adjusted return on capital from eachelement of their portfolio and judgewhich operations are therefore worthretaining within a specialised entity.Underperforming lines will either besold to the true consolidators ordiscontinued.

Unbundling the value chainAs Solvency II increases transparencyand forces insurers to re-assess thecapital dynamics of their operations,some companies may look at alternativebusiness models. Rather than being aconsolidator or specialist, the choicewould be whether to focus on aparticular aspect of a value chain that islikely to be increasingly segregatedbetween distribution, manufacturing,service (IT, administration, etc.) andcapital provision.

One of the potential benefits opened upby the unbundling of the value chainwould be enabling capital providers toalign investment more closely with theirrisk appetite and return expectations.There will continue to be investors whowill want to assume direct exposure toinsurance risk in return for the requiredlevel of reward. However, there wouldalso be other investment opportunitiesthat retain minimal insurance risk andoperate with reduced regulatoryrequirements as they concentrate onareas such as distribution, insuranceservices or other non-manufacturingparts of the value chain. This is likelyto attract fresh interest from a range


Figure 1: Possible commercial and practical implications

Multinational

Domestic

Small Large

Source: PricewaterhouseCoopers

• Choice of HO location• Tax and regulatory arbitrage • opportunities• Greater diversification benefits• Reconsideration of operating model• Acquisition opportunities (e.g. among • small players)• Strategic re-evaluation of business lines• Disposals of run-off or underperforming • books

• Inability to meet SII requirements?• Disproportionate compliance costs• Reconsideration of operating model• Seeking merger partners• Industry roll-up possibilities• Discontinuation of business• Insolvency

• Merger partners to obtain diversification • benefits• Greater diversification benefits• Reconsideration of operating model• Acquisition opportunities (e.g. amongst • small players)• Strategic re-evaluation of business lines• Disposals of run-off/underperforming • books


Waking up to new realitiescontinued...

of capital providers including financialinvestors, who may previously havebeen deterred by the complexcompliance requirements and the needto tie up significant capital to supportrisk within a conventional insurancebusiness. Other investors could includenew entrants from sectors such asIT or retail as they seek to tap intoopportunities close to their respectiveexpertise. The overall result would beclearer and more differentiatedinvestment prospects within theinsurance industry and hence the abilityto attract more capital from a wider arrayof providers. Whether or not this is theintention of the architects of Solvency IIis difficult to say, but it would certainlyprovide a valuable boost for investmentin a sector that has been finding itdifficult to compete for funds in a risk-averse and capital-constrained marketenvironment.

Investing in run-off One of the results of the two models setout on page 13 is that as an increasingnumber of life and non-life companieschoose to exit capital intensive and non-core operations, there may be a glut oftargets, which will put pressure on prices,but also provide fresh opportunities forbuyers of run-off portfolios. A survey ofmore than 500 insurance executivescarried out by PricewaterhouseCoopersin 2009 found that nearly three-quarterssee the proactive management of theirorganisation’s run-off as a priority forsenior management, with Solvency IIseen as one of the key factors drivingthis growing focus.19 The concept ofconsolidating and servicing closed booksof business, which seeks to optimisecapital, cost and regulatory synergies, islikely to become more accepted as aresult, particularly in continental Europewhere it is less developed than the UK.This will in turn attract new entrants tothe market through acquisitions of closedinsurance portfolios, which could includemore financial investors.

Emerging stronger

With only two years to go beforeSolvency II comes into force, the needfor boards to assess the impact on theeconomics of their businesses andhow they should respond is becomingever more urgent. Divestment andconsolidation are set to play a key partin this strategic reappraisal and resultingrestructuring, enabling companies tore-balance their portfolios, sharpenspecialisation or focus on a particularaspect of the value chain, depending ontheir choice of business model.


19 ‘Unlocking value in run-off: A survey of discontinued insurance business in Europe’, published by PricewaterhouseCoopers in March 2009

Editorial eyeThe focused business models that emerge as a result of the move toSolvency II could help to attract fresh investment into the industry. However,with deal appetite still constrained in the aftermath of the financial crisis,articulating a convincing acquisition or divestment rationale that supportsthe wider strategic objectives of the company in the post-Solvency IIenvironment will be critical for success.


Looking Ahead We predict increasing private sector activity

The second half of 2009 saw amarked slowdown in Europeangovernment-led financialservices transactions. Privatesector deal activity also declined,but less rapidly.

We believe M&A activity will begin torecover during 2010 as industryrestructuring gathers pace. Respondentsto our online survey of deal professionalsappear to agree, with 59% of thosesurveyed expecting other financialinstitutions to be the most prominentbidders for financial services targetsduring 2010 and 2011.20 In contrast, only14% now expect governments to takethe most prominent role.

We believe that increasing stability infinancial markets will help to reduceprice expectation gaps during the yearahead, drawing more potential buyersinto the marketplace. This will be crucialif the level of private sector transactionsis to increase materially. Our surveysuggests that there are still far morewould-be sellers than potential buyersfor financial services businesses(see Figure 1), although the 60% ofrespondents expecting to seedivestments during 2010 is less than the86% recorded in last year’s survey.

Nonetheless, it is encouraging to findthat 73% of respondents expectappetite for large financial services dealsto increase slightly or strongly during theyear (see Figure 2 overleaf). This marksa considerable change from lastyear’s survey, when only 42% expectedthis to be the case. Considering therecent slowdown in public sectortransactions, we feel that this supportsour prediction of increased privatesector activity during 2010.

Indeed, most European governmentshave already switched their focusfrom the targeted support of certainfinancial institutions to planning theirexits from bank shareholdings in themedium to long term. However, webelieve it unlikely that large-scale exitsby European governments willmaterialise during 2010.


0 20 40 60 80 100

Don't know

More likely to be buyers of...

More like to be sellers of...

■ 2009 ■ 2010

60

29

11

86

14

Figure 1: Do you anticipate that financial institutions will be more likely to divest assets than be buyers of new business? (%)

(Respondents could only choose a single reponse)

Source: European FS M&A online survey, Nov ’08 – Jan ’09 and Dec ’09 – Jan ’10

20 For details of our online survey, please refer to the information on page 18 headed ‘About PwC’


Looking Aheadcontinued...

Specific areas where we expect to seefurther deal activity in the near futureinclude UK banking, as discussed in themain body of this edition (see ‘BritishBanks – Back in the sights of foreigninvestors?’), and scale-buildingtransactions among European insurers(see ‘Waking up to new realities – Theimpact of Solvency II on strategy andM&A activity in the insurance industry’).

We also expect that non-core disposalsby banks will continue to play a majorrole in deal activity. Again, this viewis supported by the majority ofrespondents to our survey (62%).Asset management businesses willcontinue to change hands, and not justin response to disposals by banks.We also anticipate further consolidationamong independent firms as assetmanagers seek to harness the potentialbenefits of scale.

Nor do we believe that non-coredivestments be limited to assetmanagement. We predict that universalbanks will trim peripheral activities inareas such as consumer finance, generalinsurance, securities brokerage andsecurities services. In each case, jointventures could remain an attractiveoption for parent groups not in need ofa quick or outright sale.

In particular, a number of Europeanbanks now have significant divestmentrequirements to implement if they are tosatisfy European Commission conditionsrelating to State Aid. For instance,Royal Bank of Scotland has alreadycommenced large-scale disposals,which we expect will feature amongsome of the larger transactions of2010.21 Restructuring activity at otherlarge state-supported banking groupsincluding Lloyds Banking Group in theUK, KBC in Belgium and ABNAMRO/Fortis Bank Nederland is alsolikely to contribute to deal activity duringthe year.

Looking further forward, we continue tobelieve – as discussed in the previousedition of Insight – that financial servicesin Central and Eastern Europe and theCommonwealth of Independent States isdue for a round of restructuring.Although progress has been slowerthan expected, we still feel that parentgroups from outside the CEE and CISregion would welcome the chance tosell, if they could do so without incurringmaterial asset value write-downs.

Lastly, we expect private equity firms tocontinue to take part in financial servicesM&A, albeit in niches. Waterland’spurchase of Intertrust and AnaCap’sacquisitions of Ruffler Bank and CattlesInvoice Finance during 2009 suggestthat private equity could play a role inbanking carve-outs during 2010.For example, it is expected that privateequity firms will feature as bidders inthe sale of WorldPay by The Royal Bankof Scotland.


0 10 20 30 40 50 60 70

Don't know

Decrease strongly

Decrease slightly

Remain the same

Increase slightly

Increase strongly 15

27

10

21

25

2

12

61

3

1

6

17

Figure 2: How do you expect appetite for large deals to develop over the coming year? (%)

(Respondents could only choose a single reponse)

Source: European FS M&A online survey Nov ’08 – Jan ’09 and Dec ’09 – Jan ’10

■ 2009 ■ 2010

21 RBS media release, 03.11.09


MethodologyFS M&A Deal Activity analysis

This issue includes financialservices deals:

• Over €25 million reported bymergermarket, Thompson andDealogic;

• Announced in the calendar year2009, and expected to complete;

• Involving the acquisition of a >30%stake (or significant stake givingeffective control to the acquirer); and

• Acquisitions of Europe based financialservices targets where a deal valuehas been publicly disclosed.

This year we enhanced our datacoverage compared to prior years withthe inclusion of Dealogic information.However, comparatives used in priorissues have not been restated.

Our analysis also excludes deals that, inour view, are not ‘true’ financial servicesdeals, e.g. real estate deals and sales/purchases of asset portfolios where thedisclosed deal value represents thevalue of assets sold.



About PwCM&A advisory services in the financial services sector

PricewaterhouseCoopers is aleading consulting andaccounting advisor for M&A inthe financial services sector.Through our Corporate Finance,Strategy, Structuring, TransactionServices, Valuation, Consulting,Human Resource and Taxpractices, we offer a full suite ofM&A advisory services.

The main areas of our services are:

• lead advisory corporate finance

• deal structuring, drawing onaccounting, regulation and taxrequirements

• due diligence: commercial, financialand operational

• post-merger integration: synergyassessments, planning and projectmanagement

• valuation and fairness opinions

• human resource and pensionscheme advice.

For more information on any of theabove services or if you have any otherenquiries, please contact:

Nick [email protected]

Fredrik [email protected]


About this reportIn addition to the named authors of the articles, the main authors of, and editorial team for, this report were Nick Page,a partner in PricewaterhouseCoopers (UK) Transaction Services-Financial Services team in London and FredrikJohansson, a director in PricewaterhouseCoopers (UK) Strategy-Financial Services team in London. Other contributionswere made by Andrew Mills of Insight Financial Research and Maya Bhatti, Caroline Nurse, Antoine Royer and KatrinaHallpike of PricewaterhouseCoopers (UK).

About the survey conducted for this studyBetween December 2009 and January 2010, PricewaterhouseCoopers (UK) conducted an online survey of a sampleof its European Financial Services clients, gathering their responses to key questions about the development of M&Aactivity during 2010 and 2011. The survey was completed by 212 individuals (Nov 2008 – Jan 2009 online survey, 292respondents) located throughout Europe. There was a spread of respondents from banking, insurance, asset management,private equity and other sub-sectors of financial services.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and theirstakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness ofthe information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assumeany liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or forany decision based on it.

For further information on the Global FS M&A Marketing programme or for additional copies please contact Maya Bhatti, Global FS Marketing, PricewaterhouseCoopers (UK) on+44 (0) 20 7213 2302 or at [email protected].

Are you ready to capitalise?

Deal activity in the financial services industry islikely to increase in 2010 as markets stabilise andrestructuring in the sector gathers pace.

Is your organisation ready to take advantageof the renewed opportunities for divestment andacquisition?

If you are looking to restructure or grow yourbusiness, visit www.pwc.com/financialservices.

© 2010 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in theUnited Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity.

European Financial Services M&A Insight February 2010 · Aug Friends Provident Plc United Kingdom...

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