PwC's Transaction Services finds mergers and acquisitions among financial services companies are expected to gain momentum in 2011, spurred by growing confidence in the economy, investors with deep pockets and pent-up demand for deals. The research and consulting company released its fourth annual M&A analysis and outlook Tuesday for the financial services sector, entitled "Positioning for Growth: 2011 U.S. Financial Services Insights." Among the highlights:

  • Well-capitalized corporate buyersare seeking margin growth and the realization of synergies through strategic acquisitions that expand their footprint and product capabilities;
  • Private equity firms, which have been focused on improving existing portfolio companies, will play an increasingly significant role in financial services M&A, as the impetus to put capital to work is bolstered by the revival of the bond markets and a growing market appetite for leveraged deals;
  • Recent and prospective regulatory changes will drive small- and medium-sized banks to seek scale through acquisitions, creating significant M&A opportunities in 2011.

"After years of focus on recovery, retrenchment and rebuilding balance sheets, the mindset of financial services firms is shifting to a more aggressive search for growth and competitive advantage," John Marra, who holds the title of “transaction services–financial services leader” for PwC US, said in a statement. "Financial services companies are gaining confidence in the economic recovery, and they see stabilizing market valuations that remain well below pre-financial crisis levels. Many investors are seeking to diversify existing products or distribution channels with opportunistic strategic acquisitions."

According to the analysis, the value of announced financial services M&A deals rose to $50.9 billion in 2010 from $36.1 billion in 2009, but remained significantly below the $153.2 billion of deals announced in 2008. A total of 840 deals were announced in 2010, compared with 613 deals in 2009 (for which values were disclosed for 267 and 175 of the deals in 2010 and 2009, respectively).

A significant portion of deal activity in 2011 is expected to be driven by divestitures. Large banks and insurance companies that need to bolster capital levels are divesting non-core operations and margin-dilutive subsidiaries. In addition, regulatory changes such as the Volcker Rule, which restricts proprietary trading and certain investment management activities by banks, are likely to drive M&A activity in the asset management space as institutions consider divestitures to avoid restrictions imposed by the pending legislation.

Asset Management: Continued Deal-Making, Albeit at a Slower Pace

  • The recovery in the equity markets since early 2009 resulted in significant increases in management and performance fee income among asset managers, pushing valuations higher and encouraging greater M&A activity.
  • Divesture activity among asset managers is likely to increase due to financial reform regulations such as the Volcker Rule, although its immediate impact may be mitigated by the likelihood of a transitional period.
  • Most consolidation activity will involve small- to medium-sized asset managers, as pure-play firms seek greater cost efficiencies, expanded scale, new distribution channels and broader product offerings. Private equity funds, already prominent acquirers in alternative investments, are likely to continue to be active investors in this space.
  • Expect foreign buyers, particularly from Asia, to continue to play a key role in the U.S. asset management M&A space in 2011.