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Sharing deal insightEuropean Financial Services M&A news and views

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2 PwC Sharing deal insight

Contents

03 Welcome

04 Data analysis

07 Looking Ahead

08 PE looks to new structures and strategies

14 Striking the right balance between regulation and returns

16 Methodology

17 About PwCM&A advisory services in the financial services sector

18 Contacts

€9.7bnof financial services deals in the first quarterof 2012

€5.8bnsale of RBS Aviation Capital was the largestsingle European FS deal for over two years

As our Data analysis section highlights,signals from the M&A market continue tobe mixed. European financial servicesdeal values in the first quarter of 2012were down on the final quarter of 2011,though it was unlikely that the flurry ofactivity seen at the end of 2011 would besustained. The €9.7bn of transactions inQ1 2012 was some way up on the middlequarters of 2011, but much of it camefrom a single deal, the sale of RBSAviation Capital for €5.8bn. What wasperhaps most surprising, and almostcertainly exceptional, was the low level ofbanking deals in Q1 2012. The total valueof banking transactions was €1.9bn,much of which came from CaixaBank’smerger with local counterpart BancaCivica, which was valued at €977m. Thiscompares with an average quarterly dealvalue of more than €6bn in the bankingsector over the past two years.

So what are the prospects for theremainder of 2012? While concerns overthe eurozone crisis, the outlook for theEuropean economy and the impact ofincoming regulation are making somebuyers reluctant to engage in deal activity,these very challenges also make theimpetus and rationale for M&A all themore pressing. As growth slows andtougher capital requirements come intoplay, financial services businesses arefacing increasing pressure to shore uptheir balance sheets, seek out new sourcesof growth and divest non-core operations.As uncertainty and risk-aversion on theone side come up against the pressure forrestructuring and strategic reorientationon the other, the fluctuations in quarterlydeal values are likely to persist for sometime to come.

The main focus in this edition is privateequity (PE), which has been a significantinvestor in the European financialservices market over the past two years.As we examine in PE looks to newstructures and strategies, although PEacquisition has slowed since the surge in2010 and the first half of 2011, interesthas continued into 2012. Notable dealsinclude the acquisition of Quilter, awealth management business, byBridgepoint Capital.1

Despite the impact of the financial crisisand a preference against highly regulatedsectors, financial services remains tooimportant an industry for PE to ignore.Moreover, while access to debt finance ismore constrained than a year ago, many

PE funds are sitting on significantamounts of acquisition finance,accumulated in the lead-up to the crisis.However, the crisis has forced PE funds tochange tack. With lenders demandingmore conservative financing structures,revenue growth and operationalimprovement rather than financialleverage have become the key drivers ofreturns.

As our second PE article, striking the rightbalance between regulation and returnshighlights, balancing tax- and capital-efficiency with the need to secureregulatory approval has always been atough challenge for PE buyers. Tightercapital and change of control rules areraising the bar still further. Both vendorsand buyers will therefore need to lookagain at their due diligence requirements,how they structure acquisitions and howto manage the transition and post-dealintegration.

We hope that you find this edition ofSharing deal insight interesting. Please donot hesitate to contact either of us, or anyof the article authors if you have anycomments or questions, or would like todiscuss the issues in more detail.

Welcometo the second edition ofSharing deal insight for 2012.

Nick PagePwC [email protected]

Fredrik JohanssonPwC [email protected]

Sharing deal insight provides perspectives on the latest trends and future developments in the financial servicesM&A market, including analysis of recent transactions and insights into emerging investment opportunities.

PwC Sharing deal insight 3

1 Bridgepoint Capital media release, 24.01.12


The total disclosed value of Europeanfinancial services M&A announced duringthe first quarter of 2012 was €9.7bn.2

This represents a 40% decline from theprior quarter’s figure of €16.3bn, andmarginal fall of 1% from the comparativefigure of €9.8bn recorded in the firstquarter of 2011.

At face value it is encouraging that,despite the decline, the quarter’s totalof €9.7bn still exceeded the figures of€6.7bn and €5.0bn recorded in thesecond and third quarters of 2011.However, the total disclosed value for thefirst quarter of 2012 is distorted by onevery large deal – Royal Bank of Scotland’s€5.8bn sale of RBS Aviation Capital toSumitomo Mitsui (see Figure 1). Withoutthis transaction, the first quarter of 2012would have seen a total value of just€3.9bn for European financial servicesM&A – one of the weakest quarterlyresults in nine yearsof data.

Apart from this one very large deal,there was a comparative absence of largeannounced transactions during the firstquarter of 2012. Just four deals werevalued between €250m and €1bn,compared with eight in the previousquarter and six in the first quarter of

2011. This had a significant effect on totaldeal values.

The continuing decline in small and mid-market financial services M&A deals wasanother feature of the quarter. This is nota new trend, but it is notable that the totalnumber of transactions captured by ouranalysis – including those with nodisclosed deal value – has now fallen forseven months in a row (see Figure 2).This is an understandable response toongoing valuation difficulties, which inturn reflect factors such as financialmarket volatility, an uncertain economicoutlook and the limited availability ofdebt finance.

Quarter on quarter, the main driver ofweaker deal values and volumes was acomparative absence of M&A involvingbanking targets. The total value ofbanking deals with disclosed values was€1.9bn, compared with an average figureof €6.6bn for the previous eight quarters(see Figure 3 on page 6). Furthermore,almost all of this €1.9bn was representedby CaixaBank’s merger with localcounterpart Banca Civica, valued at€977m, and KBC’s sale of Polish bankingunit Kredyt Bank to Santander’s localsubsidiary Bank Zachodni in a shareexchange valued at €790m. Given

Data analysis

We concluded our last publication with a warning of the unpredictability of the European FS M&A market.Deal data for Q1 2012 bears this out, including the largest single deal for over two years, but also an exceptionallylow level of banking transactions with disclosed values.

2 Deal data is sourced from mergermarket, Reutersand Dealogic, unless otherwise specified. Fordetails of our analysis methodology, please refer tothe information on page 16


banking’s habitual dominance ofEuropean financial services M&A over thepast decade, and the continuingimperatives of European bankrestructuring, this must surely be anexceptional result. The spike in ‘other’M&A was driven by the sale of RBSAviation Capital.

The total value of insurance deals withdisclosed values also fell back during thefirst quarter of 2012, in contrast to thesector’s busy previous quarter. Thequarter’s most notable insurance deal was

KBC’s sale of Polish insurer Warta for€770m to Talanx of Germany and itsminority partner Meiji Yasuda of Japan.This interesting transaction illustrates theattractions of Eastern European growth toinsurers from more mature markets inWestern Europe and – as discussed in theDecember 2011 edition of this paper – inAsia. Several other international groupswere reported to have expressed aninterest in Warta.3

Figure 1: European FS M&A by value (€bn), Q1 2010–Q1 2012

Source: PwC analysis of mergermarket, Reuters and Dealogic data

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15

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10

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0Q1 10€8.6bn

Q2 10€11.1bn

Q3 10€21.2bn

Q4 10€9.5bn

Q1 11€9.8bn

Q2 11€6.7bn

Q3 11€5.0bn

Q4 11€16.3bn

Q1 12€9.7bn

1. €3.3bn AXA SA(UK life and pensionsbusinesses) –Resolution Limited

2. €1.4bn KBL EuropeanPrivate Bankers SA –The Hinduja Group

1. €3.8bn Allied Irish Banksplc (91%) – Ireland

2. €1.1bn Bluebay AssetManagement Plc –Royal Bank of Canada

1. €2.6bn Bank of Moscow OAO (46%) – VTB Bank OAO2. €1.8bn Caja de Ahorros y Pensiones de Barcelona La Caixa

(Banking operations) – Criteria CaixaCorp SA3. €1.1bn Vidacaixa-Adeslas Seguros Generales (50% Stake) –

Mutua Madrilena Automovilista SL

1. €1.1bn RACPlc – TheCarlyle Group,LLC

1. €5.8bn RBSAviation

2. €1.0bn BancaCivica

1. €1.3bn Bank of Moscow (34%) – VTB Bank OAO2. €1.1bn Bank of Ireland (37%) – Group of investors led

by Fairfax Financial Holdings

1. €4bn Dexia Bank Belgium2. €2.5bn Skandia Insurance3. €1.8bn Bank Sarasin4. €1.3bn Banco Pastor

1. €3.9bn Deutsche Postbank AG (70%) – Deutsche Bank2. €3.1bn Bank Zachodni WBK SA – Banco Santander3. €2.3bn RBS WorldPay – Investor Group4. €2.0bn RBS Group (318 branches) – Banco Santander

1. €1.3bn BNP Paribas LuxembourgSA (47%) – BGL BNPP

2. €1.2bn RBS Sempra CommoditiesLLP (European & Asiaoperations) – JP Morgan Chase

Figure 2: European FS M&A by disclosed value (€bn) and number of deals,Q1 2010–Q1 2012

n Deal value Deal volume


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3 ‘beyondbrics’, Financial Times, 16.03.12

€770mThe quarter’s mostnotable insurancedeal was KBC’ssale of Polishinsurer Warta for€770m to Talanxof Germany and itsminority partnerMeiji Yasuda ofJapan.

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Asset management deals with disclosedvalues remained very subdued during thefirst quarter. Our dataset captured nearly20 asset management transactionsannounced during the period, but manyinvolved privately held targets withoutdisclosed deal values. The majorexception was Morgan Stanley’s €216msale of UK firm Quilter to BridgepointCapital, the only asset managementtransaction to make it into the quarter’sTop 10 announced deals (see Figure 4).The sale reflects Morgan Stanley’sintention to focus its wealth managementefforts on the ultra-high net worthsegment. It was also the first quarter’slargest announced PE transaction.

A review of the first quarter’s remainingTop 10 announced deals and other,smaller transactions reveals some otherthemes.

• Vertical integration by exchanges.The London Stock Exchange (LSE)announced its acquisition of acontrolling stake in clearing houseLCH.Clearnet for €463m. This followsthe LSE’s recent €532m acquisitionof the remaining 50% of listings’business FTSE International. Like manyof its international competitors, theLSE is looking to diversify its earningsand develop a presence in the post-trade arena.

Looking ahead, the mooted sale ofmember-owned London MetalsExchange holds out the prospect offurther M&A activity in the exchangespace. NYSE Euronext and the ChicagoMercantile Exchange have both beenreported to be considering a bid.4

• Non-core disposals by banks. Eventhough the first quarter of 2012 was anexceptionally quiet one for bankingM&A, European financial servicesgroups continue to divest non-coreunits in response to EU State aid rulingsand the need to strengthen capitalratios.

KBC and Royal Bank of Scotland wereamong the quarter’s most notablesellers. As already discussed, KBC notonly sold Polish insurer Warta for€770m, but also Polish bank KredytBank to Santander’s local subsidiary for€790m. As well as announcing the€5.8bn sale of RBS Aviation Capital,RBS also sold its UK corporate brokerHoare Govett to US investment bankJefferies for an undisclosed sum.

• Consolidation in Spanish banking.In addition to CaixaBank’s €977mmerger with Banca Civica, BBVAacquired Unnim from the FROB, theSpanish government’s bankrestructuring vehicle, for a token sumof €1. The price indicates the weaknessof some Spanish mutual banks’solvency, but it does not reflect thestrategic significance of a listed bankacquiring a mutual institution.

The Spanish governments’ decision toconvert its €4.5bn of state aid to Bankiainto a 45% equity stake,5 and recentpublic statements by the governor ofthe Bank of Spain on the need forfurther restructuring,6 suggest that thepotential for fresh transactions remainsstrong.

• PE activity interest in selected areas.PE firms continue to play a modest butinfluential role in European financialservices M&A, particularly in habitualareas of interest such as wealthmanagement and transaction

Figure 3: European FS M&A by value (€bn), analysed by subsector,Q1 2010–Q1 2012

n Asset Management n Banking n Insurance n Other


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Q2 10€11.1bn

Q3 10€21.2bn

Q4 10€9.5bn

Q1 11€9.8bn

Q2 11€6.7bn

Q3 11€5.0bn

Q4 11€16.3bn

Q1 12€9.7bn

€216mMorgan Stanley’s€216m sale of UKfirm Quilterto BridgepointCapital, the onlyasset managementtransaction to makeit into the quarter’sTop 10 announceddeals.

4 ‘NYSE Euronext and CME kick off race for LME’,Financial Times, 18.02.12

5 ‘Spain takes 45% stake in Bankia’, FinancialTimes, 09.05.12

6 ‘Bank of Spain faces battle to win reform’,Financial Times, 15.04.12


processing. In addition to Bridgepoint’sacquisition of Quilter, we note AnaCap’spurchase of the international divisionof Irish pension administrator IFGfor €84m. Two other deals with nodisclosed value were the acquisition ofBelgian asset manager Quest by localPE firm Capricorn, and Apollo’spurchase of Bank of America’s Irishcredit card business.

The quarter also saw theannouncement of several PE mergers.The largest such deal was Norwegianfirm Verdane’s acquisition of Swedishcounterpart Capilon for €16m. Twoother transactions without disclosedvalues were the purchase of ViverisManagement by French rival ACG, andUK firm Aureos Capital’s acquisition byAbraaj of the UAE.

Looking AheadIn the last edition of this paper wehighlighted the current unpredictabilityof European financial services M&A. Evenso, barring any major economic shocks,we see several reasons to hope for at leasta modest improvement in deal activityover the next two quarters.

First, there are some specific prospects forupcoming M&A activity. These includeDeutsche Bank’s anticipated disposal ofits alternative asset management businessRREEF,7 the possible sale of the LME, andthe on-going battle for control of Italianinsurer Fondiaria.8

Second, several European financialservices markets have particular potentialto generate deals. As already discussed,the Spanish banking sector is among themost obvious. Italian banks, underpressure from the ratings agencies,9 alsocontinue to offer scope for consolidation.

More generally, we expect to see arebound from the exceptionally low levelof banking M&A in the first quarter of2012. We also question how long thedecline in small and medium sizedtransactions can continue, especiallyconsidering the gradual improvements infinancing conditions. At this point in thecycle, an improvement in the volume ofdeals could be a more significantindicator of a recovery in Europeanfinancial services M&A than an uptickin deal values.

Figure 4: Top 10 European FS deals by value, Q1 2012

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

Jan RBS Aviation Capital Ireland Sumitomo Mitsui Japan 5,760

Mar Banca Civica Spain CaixaBank Spain 977

Jan Kredyt Bank Poland Santander/Bank Zachodni Spain/Poland 790

Jan Warta Poland Talanx, Meiji Yasuda Germany, Japan 770

Mar LCH.Clearnet (60%) UK London Stock Exchange Group UK 463

Jan Quilter & Co UK Bridgepoint Capital UK 216

Jan Sekerbank (34%) Turkey SamrukKaznaya Kazakhstan 130

Mar Aktiv Kapital (54%) Norway Geveran Trading Norway 104

Mar IFG Group (International division) Ireland AnaCap Financial Partners UK 84

Jan Mackenzie Hall UK Portfolio Recovery Associates US 40

Subtotal 9,334

Other 323

Grand total 9,657


7 ‘Guggenheim in talks to buy Deutsche unit’,Financial Times, 29.04.12

8 ‘Arpe stake in Fondiaria casts doubt on Unipolmerger’, Financial Times, 15.02.12

9 ‘Moody’s cuts ratings for 26 Italian banks’,Financial Times, 15.05.12


A year ago, we reported on how manyPE funds had greatly increased theirdedicated financial services deal teams asthey looked to capitalise on growingdivestment and restructuringopportunities in the sector and takeadvantage of the thawing of the debtmarkets. This heightened interest wasreflected in a surge in deals through tothe autumn of 2011 (see Figure 5).

Although activity has since beentempered by uncertainty over thesovereign debt crisis, deal-making hascontinued (see Figure 6), especially at themid and lower end of the value spectrum.While access to debt finance is moreconstrained than a year ago, many PEfunds are sitting on significant pools ofuninvested capital accumulated in thelead-up to the financial crisis.

PE looks to new structuresand strategies

Minal ShahPwC UK+44 (0) 20 7213 [email protected]

Despite the financial crisis, the financial services industry remains too important a sector for PE to ignore.What are the prospects for PE investors in the current market and how can financial services businesses attractPE buyers for their divestments?

Figure 5: Monthly PE deal activity in European financial services


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Figure 6: Top 10 private equity acquisitions in European financial services announced since April 2011

Announced Target Sector Target country Acquirer Acquirer country Value (€m)

June 2011 RAC Insurance UK Carlyle Group US 1,123

September 2011 SAV Credit Banking UK Varde Partners US/UK 543

December 2011 Crédit Agricole Private equity France Coller Capital UK 300Private Equity

May 2011 Compagnie Insurance France JC Flowers US 891Européenne brokerde Prévoyance

June 2011 Lowell Group Debt UK TDR Capital UK Undisclosed*management

August 2011 Saxo Bank Brokerage Denmark TPG US 420(30%)

December 2011 Guardian Financial Insurance UK Cinven UK 336Services

July 2011 DNCA Finance Asset management France TA Associates US 267

October 2011 Fidea NV Insurance Belgium JC Flowers US 244(50%)

January 2012 Quilter Wealth management UK Bridgepoint Pan-EU 216Capital

Source: mergermarket, Dealogic, company websites*The acquisition value was not disclosed, but a report from European private equity website unquote.com estimated it was between €300m and €600m


Investment focusPE investors have always been reluctantto take on the cost and complexities ofcompliance or tie up funds and curtailyields through high capital charges.

Within financial services, capital- andcompliance-light service-basedbusinesses, with strong and predictablecash flows, have as a result tended toattract the most interest from PE buyers.This includes companies with recurringfee income such as asset managers andfund administrators. It also includesintermediary businesses such as IFAs andinsurance brokers, or companies servicingunderwriters such as claims managersand loss adjusters. In contrast, balancesheet-intensive businesses such as banks,insurers and reinsurers, which are subjectto tighter regulation, capital charges,business model complexity, inherent

leverage and long-term risks, have tendedto be less attractive to PE buyers.

Yet, PE has on occasion taken on risk-taking businesses as part of a nichestrategy, or where there is a clear valueopportunity. Notable examples in the past18 months include the public-to-privatebuyout of Lloyd’s non-life insurer, BritInsurance, by Apollo Global Managementand CVC Capital Partners,10 which cameat a time when valuations of listedinsurance companies were affected by agenerally soft premium rate environment.

Alongside WorldPay’s acquisition byAdvent International and Bain Capital,11

the Brit deal is notable in demonstratingPE funds’ growing willingness tocollaborate, allowing them to bidsuccessfully for assets that mightotherwise be out of their price range.Partnership also limits their risk to anyindividual investment.

Further opportunities for PE investors arecoming from the desire of governmentsto promote greater competition andencourage new entrants into the financialservices market. Examples include RBSEquity Finance’s 2011 buyout ofWhiteaway Laidlaw Bank to createShawbrook Bank, a new savings andlending institution.12

Further opportunities for PE investors arecoming from the desire of governments topromote greater competition and encouragenew entrants into the financial servicesmarket.

10 Offer Document and Position Statement,published by Brit Insurance on 23.11.10

11 Advent International media release, 06.08.10

12 Shawbrook Bank website, 25.04.11


Meanwhile, high levels of consumer debthave expanded the potential growthopportunities for debt purchasing,collection and management businesses.Recent deals include AnaCap FinancialPartners’ purchase of Cabot Financial,13

TDR Capital’s secondary buyout ofLowell Group from Exponent PrivateEquity14 and TowerBrook Capital Partners’acquisition of CapQuest.15

Innovative structuresThe development of innovative newstructures to support the move intofinancial services was highlighted byJC Flowers’ investment in Kent RelianceBuilding Society in 2010, which wassubsequently renamed OneSavingsBank.16 The acquisition structuretransferred Kent Reliance’s members’interests into an industrial and providentsociety, thereby preserving its mutualstatus. The members took a 60% share ina bank holding company, in which JCFlowers holds a 40% stake in return for its€60m investment. This deal could serveas a blueprint for further consolidationactivity in the UK building society sector,as well as other mutually owned savingsbusinesses across Europe, including theSpanish cajas and German landesbanks.The impetus for investment is comingfrom the regulatory pressure to raise

capital levels and the attractive lendingmargins currently available.

Our next article, Striking the right balancebetween regulation and returns, looks atthe importance of rigorous due diligenceand finely tuned structuring in balancingcompliance, tax- and capital-efficiency ina tougher regulatory environment.

Pragmatic approachIf the financial crisis has created freshopportunities for PE investment infinancial services, it has also affectedthe strategies for delivering returns.In particular, financial leverage is notavailable to the same extent and at thesame advantageous cost as before. Withlenders demanding more conservativefinancing structures than before thefinancial crisis, revenue growth andoperational improvement have becomethe key drivers of returns. Moreover,private equity investors are facing a moredifficult exit environment than beforethe crisis. This includes lower marketvaluations and more cautious tradebuyers. The inability to rely on favourableexit multiples may mean longerinvestment holding periods as moretime may be needed to generate theearnings growth necessary to achievetargeted returns.

13 AnaCap Financial Partners media release,23.06.11

14 Lowell Group media release, 20.06.11

15 TowerBrook Capital Partners website, 25.04.12

16 Kent Reliance media release, 31.01.11


One strategy is bolt-on acquisitions torealise synergistic gains ahead of exit.Examples include WorldPay’s purchase ofCardsave17 as it looked to strengthen thedistribution of its services. Another is theacquisition and integration of over 25smaller competitors by UK insurancebroker, Giles, since its acquisition byCharterhouse in 2008.18

PE acquisitions over the past six monthsreflect the continuing drive forconsolidation and opportunities forinvestment created by divestment. InDecember 2011, Cinven bought GuardianFinancial Services. ‘Guardian provides anexcellent platform from which the newsenior management team can execute aconsolidation strategy in the closed lifemarket,’ said Caspar Berendsen, a partnerat Cinven.19 In January 2012, BridgepointCapital acquired Quilter, a wealthmanagement business, from MorganStanley. Commenting on the deal,Michael Black, a partner at Bridgepointsaid: ‘Quilter is a long-established andhighly regarded UK private client wealthmanagement business operating in a largebut fragmented market favoured byunderlying structural growth drivers.As such, we believe that there is everyopportunity for Quilter to accelerate itsgrowth organically, as well as makecomplementary acquisitions for thebusiness.’20

Assessing the prospectsThe tightening regulatory environmentcould add to the costs and complexities ofinvesting in banks, insurers and assetmanagement firms. Yet, these pressurescould also force larger financial servicesgroups to make further divestments asthey look to raise capital, resulting inopportunities for PE to back managementteams with credible growth strategies.Moreover, the businesses that are able tomeet the new regulatory demands couldbe viewed as especially robust and incontrol of their operational risks.

The success of many financial servicesbusinesses depends on the quality of theirmanagement and staff, and the risk oflosing key personnel such as star fundmanagers at an asset management firm isa further challenge facing PE investors.Potential safeguards include introducingearn-out and lock-in arrangements for keystaff, as well as agreeing deferredconsideration arrangements.

With significant levels of uninvestedcapital, private equity will continue tobe an important source of capital forfinancial services businesses, particularlyas traditional sources of finance such asbanks and equity markets remain difficultto access in the current risk-averseeconomic environment. However,financial services businesses hoping toattract PE investment need to be veryclear in their investment proposition –in particular cash generation potential,growth strategy and full-risk profile.

Finally, private equity investors will needto remain disciplined and focused onvalue creation if they are to deliverinvestment returns comparable to thoseachieved in the pre-crisis environment.We expect capital-light, cash generativeand service-oriented financial servicesbusinesses will continue to attract the mostprivate equity interest. Meanwhile, the‘buy-and-build’ approach has shown itselfto be an effective and repeatable methodof boosting growth in portfolio companies(while controlling risk) and it is likely thatthis will become an increasingly prevalentinvestment strategy.

Editorial eyePE M&A activity has fallen back since the surge in activity in 2010 and 2011.Yet interest will continue in a sector that makes up a significant element of theEuropean economy and in which restructuring and regulation are bringingattractive targets to market. New regulation will create further complexity, butwill also open up fresh opportunities.

17 WorldPay media release, 21.12.10

18 Giles Insurance Brokers website, 25.04.12

19 Cinven media release, 21.12.11

20 Bridgepoint Capital media release, 24.01.12


The need to meet regulatory capitalrequirements (i.e. tying up high levels ofequity capital) has effectively ruled outthe classic leverage model for privateequity investment in banks, insurers andother highly regulated financial servicesbusinesses. As such, the use of leverage(typically used to achieve themanagement equity hurdle) is oftenlimited within the capital structure of aregulated firm. Both Basel III andSolvency II will tighten up the rules on therequired level and eligibility of Tier 1capital still further.

There are ways in which the holdingcompany and its subsidiaries can becapitalised so as to meet the needs ofPE buyers, while maintaining regulatorycapital requirements. But buyers will stillhave to meet the fitness and proprietarytests needed to secure change of control,with the way they intend to structure andmanage the business being keyconsiderations.

Raising the barChange of control has always beensomething of a minefield. For example,the compliance and capital criteria onotherwise identical asset managementbusinesses would be very different if oneholds client money and the other doesn’t.

The UK FSA and its successor theFinancial Conduct Authority (FCA) nowintend to raise the bar on change ofcontrol by focusing on the ‘customerjourney’. This includes judging whetherthe acquirer will be able to maintaincontinuity of product features andservices for existing customers. Howmuch of a factor this is in the dealevaluation depends on the buyers’ dealrationale and operational plans. If all theywant to do is put some of their people onthe board while maintaining existingoperations, then the customer journeyclearly isn’t a major consideration.But if they want to transfer customeradministration to a new operatingplatform, then post-deal integrationis going to be a key focus for the FSAand FCA.

Bringing all the elementstogetherBuyers will therefore need to look againat their due diligence requirements, howthey structure acquisitions and how theywill manage the transition and post-dealintegration.

The ability to maintain continuity forcustomers and how this affects post-dealplans will be a crucial element offinancial, commercial and operational

Striking the right balancebetween regulation and returns

David KenmirPwC UK+44 (0) 20 7804 [email protected]

Mark WardlePwC UK+44 (0) 20 7212 [email protected]

Balancing tax- and capital-efficiency with the need to secure regulatory approval has always been a toughchallenge for PE buyers. Tighter capital and change of control rules are raising the bar still further. How canPE buyers square the circle?


due diligence. Tax, capital andcompliance considerations will all need tobe fully integrated into the structuringplans. If buyers wait until after theacquisition to get this right, then theymight find that the tax and capitalrequirements are more onerous than theyanticipated and that existing structuresare difficult to unravel.

It will be important to make it as easy aspossible for the FSA to approve the dealby presenting a clear and compellingexplanation of the customer journey andhow it meets the regulators’ expectations.The FSA’s supervisory capacity forevaluation of deals is limited andtherefore any uncertainty may lead torejection. There may be opportunities tore-present the deal, but this is of coursecostly, time-consuming and offers noguarantee of success.

The need to bring all the moving parts oftax, capital and compliance together andprepare a strong case for the deal undertoday’s tougher criteria equally applies tohow it is presented to the investmentcommittee. The higher bar for complianceand capital means that investmentcommittee members are going to look atthe deal with an even more critical eye.

Editorial eyeTax, capital and compliance considerations are inexorably linked withinfinancial services acquisitions and PE buyers will need to find a viablebalance between these potentially conflicting elements of the deal. There isno silver bullet; the right balance is specific to the acquisition target and dealstructure. Getting it right will allow the buyer to optimise the return on thetransaction. Getting it wrong opens up the risk of FSA rejection or a higherthan anticipated tax bill.

The ability to maintain continuity forcustomers and how this affects post-dealplans will be a crucial element of financial,commercial and operational due diligence.


The Data analysis section in this issueincludes financial services deals:

• reported by mergermarket, Reuters andDealogic (see Figure 7);

• announced in Q1 2012, and expected tocomplete;

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

• acquisitions of Europe-based FS targetswhere a deal value has been publiclydisclosed.

Our analysis excludes deals that, inour view, are not ‘pure’ FS deals involvingcorporate entities, or entire operations,e.g. real estate deals and sales/purchasesof asset portfolios where the discloseddeal value represents the value ofassets sold.

Methodology

Figure 7: European FS deals – quarterly summary

Deal value€ in billions Q110 Q210 Q310 Q410 FY10 Q111 Q211 Q311 Q411 FY11 Q112

Asset management 1.7 1.0 2.4 1.5 6.6 1.0 0.4 0.4 0.4 2.1 0.3

Banking 4.4 5.8 14.8 5.5 30.4 5.9 2.0 3.7 11.0 22.7 1.9

Insurance 2.0 4.1 1.8 1.6 9.5 2.0 2.5 0.2 4.0 8.6 0.9

Other 0.5 0.3 2.3 0.9 3.8 0.9 1.8 0.7 1.0 4.3 6.6

Total deal value 8.6 11.1 21.2 9.5 50.3 9.8 6.7 5.0 16.3 37.7 9.7

Corporate 7.5 10.8 17.0 4.5 39.8 9.5 4.8 3.3 10.2 27.8 9.3

PE 0.8 0.0 4.2 1.1 6.1 0.3 1.9 0.5 0.7 3.4 0.2

Government 0.3 0.2 0.0 3.9 4.3 0.0 - - 4.4 4.4 -

Other - - - - - 0.0 0.0 1.2 1.0 2.2 0.2

Total deal value 8.6 11.1 21.2 9.5 50.3 9.8 6.7 5.0 16.3 37.7 9.7

Domestic 3.9 7.5 10.2 7.1 28.7 8.5 3.0 2.6 11.1 25.2 2.9

Cross border 4.6 3.6 11.0 2.4 21.6 1.3 3.6 2.4 5.2 12.5 6.8

Total deal value 8.6 11.1 21.2 9.5 50.3 9.8 6.7 5.0 16.3 37.7 9.7

Source: mergermarket, Thomson Reuters, Dealogic, PwC analysis Note: May contain rounding errors


The main areas of our services are:

• lead advisory corporate finance;

• deal structuring, drawing onaccounting, regulation and taxrequirements;

• due diligence: commercial, financialand operational;

• business and asset valuations andfairness opinions;

• loan portfolio advisory servicesincluding performance analysis,due diligence and valuation;

• post-merger integration: synergyassessments, planning and projectmanagement;

• human resource and pensionscheme advice; and

• valuations for financial reportingpurposes.

About PwCM&A advisory services in thefinancial services sector

PwC is a leading consulting and accounting adviser for M&A in the FS sector. Through our Corporate Finance,Strategy, Structuring, Transaction Services, Valuation, Consulting, Human Resource and Tax practices, we offer afull suite of M&A advisory services.

About this reportThe main authors of, and editorial team for, this report were Nick Page,a partner and Fredrik Johansson, a director in the Transaction Services –Financial Services team at PwC UK in London. Other contributions were madeby Andrew Mills of Insight Financial Research and Tina Mayo, NatashaPitchacaren and Simin Varghese of PwC UK.

Geared up for growth?We can help you take advantage of the emerging opportunities forexpansion and acquisition. Find out more about our M&A advisory services at

www.pwc.com/financialservices

Contacts

Nick PagePwC UK+44 (0) 20 7213 [email protected]

David KenmirPwC UK+44 (0) 20 7804 [email protected]

Minal ShahPwC UK+44 (0) 20 7213 [email protected]

Fredrik JohanssonPwC UK+44 (0) 20 7804 [email protected]

Mark WardlePwC UK+44 (0) 20 7212 [email protected]

If you would like to discuss any of the issues raised in this report in more detail please contact one of us below oryour usual PwC contact.

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

For further information on the Global FS M&A marketing programme or for additional copies please contact Tina Mayo, Global Financial Services Marketing, PwC UK on+44 20 7212 2371 or at [email protected]

www.pwc.com/financialservices© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP (a limited liability partnership in the UnitedKingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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