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Financial Services M&A

By: Gurneek Gill (McGill), Francois Herman (McGill), Juan Bátiz (McGill), Abilash Prabhakaran (MIT)

Photo: Marga Santoso (Unsplash)

 

I. Industry Background


Heading into 2022, financial services M&A is still riding the wave of economic recovery that saw deal volume increase by 21% and deal value rise by 40% between 2020 and 2021. The month of January has confirmed the expectations of steady growth in the sector with major deals such as Moody’s international acquisition of a major stake in Global Credit Rating (GCR).


With financial services in the midst of a digital and technological transformation, dealmaking heavily revolves around the acquisition of technological capabilities in order to take advantage of innovative data and artificial intelligence solutions, as well as addressing cybersecurity issues. As fintech’s importance continues to grow, major financial institutions are shifting their focus to digital forms of finance and M&A remains the preferred route for transition. The boom of new IT services and cryptocurrencies is not expected to slow down anytime soon, and further disruption will continue to emerge.


Regarding asset and wealth management, consolidation of assets remains a priority for investors looking to capitalize on economies of scale and cost cutting. These cost synergies are thus a key driver of M&A deals in the sector. In addition, emerging ESG trends have led investors to shift portfolio allocation and performance objectives.


The landscape of financial services’ M&A would not be complete without mentioning the increased importance of private equity firms in dealmaking activity. In 2021 the number of deals involving PE grew to 30% compared to an average of 20% from 2016-2020. Distressed assets emerging as a consequence of the pandemic have been the preferred target of PE firms.


II. Moody’s - Global Credit Rating Company


On February 2nd, 2022, Moody’s announced plans to acquire a majority (51%) stake in Global Credit Rating Company Limited (GCR), an Africa based credit rating agency with operations spanning the continent. The terms of the transaction were not disclosed, other than that it will be funded with cash on hand and is estimated to close in Q2 2022. In just over 25 years, GCR has positioned itself as the leading credit rating agency in Africa, contributing to the continent’s growing financial markets by providing credit insight across a range of economies and sectors. Through its local presence in some of the continent’s biggest economies like South Africa, Nigeria, and Kenya, GCR has developed an unmatched on-the-ground presence and gained easy access to market participants. Rob Fauber, President and CEO of Moody’s, commented on the deal as an opportunity to combine GCR’s successful domestic operations with Moody’s global expertise; which in turn, as put by CEO Mark Joffe, will enable GCR to build on its local market insights and further develop solutions to meet a growing range of customer needs, including credit ratings, credit risk solutions, and ESG capabilities.


Over the past decade, the African investment climate has shifted away from resource extraction to investments focusing on telecommunications, relatining, and services. The IMF predicts an even greater economic transformation of the region, underpinned by the fastest urbanization rate in the world, a growing working population, and accelerating technological change. Unsurprisingly, Moody’s acquisition comes as an attempt to position itself at the dawn of Africa’s booming economy, which will usher in the need for financial institutions to facilitate borrowing and lending. Thus, as Africa’s financial future brightens, more M&A activity in the financial services industry can be expected as institutions race for footholds to profit from Africa’s growing financial needs.


III. Bank of Montreal - Bank of the West


On December 20th, 2021, the Bank of Montreal (BMO) and its wholly owned US subsidiary, BMO Harris Bank, announced their agreement to purchase BNP Paribas’s US operations, Bank of the West, for US$16.8 billion in an all cash transaction. The deal will be funded primarily by US$13.4 billion of BMO’s excess capital while the remaining US$2.9 billion will come from Bank of the West’s balance sheet at closing. The merger will greatly expand BMO’s US operations, particularly in California, where Bank of the West keeps 70% of its deposits. Upon closing, the transaction will add approximately 1.8 million customers and 514 commercial and wealth branches to BMO. With an acquisition of this size, BMO is making a scaled entry into one of the largest regional economies in the world which will also help diversify the bank’s revenue streams away from Canada. Darryl White, CEO of BMO, affirmed that the strength of BMO’s operations and integration across North American, place the company in a favorable position to “add meaningful scale” and pursue its growth in attractive markets.


In light of recent trends, BNP’s exit from the US market comes as no surprise. Last year, three other foreign-owned banks: Japan’s Mitsubishi UFJ Financial Group, Spain’s BBVA, and England’s HSBC all sold their US banking businesses to their US competitors. The cause of these exits has been attributed to strong competition and high investment costs preventing foreign banks from scaling their operations and generating significant returns. As a result, the M&A market can expect other foreign banks to follow suit and potentially see better positioned Canadian, such as BMO, and American banks preying on their struggling foreign counterparts. Not all foreign banks are expected to follow this trend, however. Some, such as Spain’s Banco Santander, are looking to do the opposite by scaling their US operations through their own acquisitions of US firms.


IV. Chubb - Cigna


On October the 7th 2021, the world’s largest publicly traded P&C insurance company Chubb (NYSE: CB) announced that it would be acquiring Cigna Corporation’s life, accident, and supplemental benefits businesses in Asia Pacific and Turkey in a deal worth $5.75 billion dollars, said to be paid in cash once regulatory terms have been agreed in mid 2022.


More specifically, Chubb stated that it would be acquiring Cigna’s dominant A&H (accident and health) and life business in Taiwan, Thailand, South Korea, New Zealand, Hong Kong and Indonesia and also Cigna’s 51% stake it had placed into a joint venture in Turkey.


Additionally, Evan Greenberg, the CEO of Chubb, said “The addition of Cigna's business, which is overwhelmingly A&H (accident and health), will rebalance our global portfolio towards this important region.” Moreover, Chubb believes the deal will increase Asia's segment of its global portfolio to $7 billion from about $4 billion in net premiums written which will mean that it represents nearly 20% of its overall business; without China. Meanwhile, Cigna, a large global health service company itself, is expected to concentrate on its own global health services portfolio.


The deal marks the most recent solidification type of deal seen in Asia’s insurance sector as earlier in 2021, HSBC acquired the French insurance company Axa’s Singaporean assets. Moreover, in 2020, Singapore life who is an upstart insurer, acquired British insurance company Aviva’s Singaporean business. Thus, it appears to be a repeat of the global financial crisis of 2008, where Asia-centered insurers utilized M&A to consolidate and develop size; diversify and grow into innovative offerings, and maximize their geographic reach. In the coming year, Asian insurers are sure to continue seeing the benefit of this ‘Programmatic M&A’. This is because these firms are well aware that research has confirmed in the past that publicly traded companies that engage in a bigger number of modestly sized acquisitions generate greater shareholder returns than those that do not.


V. PayU - BillDesk


On 1st September 2021, PayU, a Netherlands-based payment service provider owned by parent Dutch multinational conglomerate company Prosus, announced its $4.7 billion acquisition of Indian online payment gateway company BillDesk. The all-cash transaction is also the biggest ever in the Indian digital payment area.


The acquisition will go a long way in assisting PayU in achieving its long term goal of becoming one of the top online payment providers worldwide by total payment volume and this deal itself will leave the joint entity processing 4 billion transactions per year.


From a strategic standpoint, Bob Van Dijk, CEO of Prosus said “Our announcement today reflects Prosus’s desire to build valuable, global consumer internet businesses that provide useful products and services for millions of people in their everyday lives. Along with classifieds, food delivery, and education technology, payments and fintech is a core segment for Prosus, and India remains our number one investment destination.”


Alongside this, the CEO of PayU, Laurent Le Moal said “We believe this transaction will stimulate both innovation and competition within India’s digital payments industry. This will not only help to strengthen India’s digital economy, but also bring financial services to those who may have historically been excluded. This ambition is fully aligned with the Government of India’s vision of ‘Digital India’ and is a key objective for PayU across all the communities we serve globally.”


BillDesk was founded in 2000 and since then has evolved into one of the leading payment gateway providers in India. As this landscape progresses and becomes more popular, BillDesk and PayU will hope to combine their like-minded expertise to deliver India these services that continue to meet the altering payments needs of digital consumers, merchants and government enterprises in India and offer cutting edge technology to more of the disadvantaged sections of society.


M&A activity in the fintech industry in India has been soaring, even during the pandemic as seen by the chart shown below where deal value dramatically increased from 2016-2020, with data from Statista showing an increase from 15 to 185 million in deal value. This demonstrates India's escalating influence in the fintech space. Introduction of digital rupee will make this space even more interesting as brand new models progress around neobanks, wealthtech and insurtech.


VI. Future Outlook


The financial services industry is one of constant change driven by consumer trends, technological change, and a drive for consolidation in a fragmented space. 2022 will be a pivotal year as the effects of the pandemic slowly dissipate, and many long-term trends are gaining traction.


M&A in 2022 will continue to be impacted by a long-term digital shift. Cryptocurrencies, NFTs, and fintech companies are emerging as the next wave of financial innovation and the ability to successfully adapt to these shifting trends is a top priority for financial institutions. Investments in cybersecurity, transaction speed, and new IT infrastructure through M&A is thus expected to play an important role in 2022 and the years to come. It remains to be seen if the high valuations of fintech companies are warranted (or not) by synergies, value creation opportunities, and industry growth.


Shifting consumer trends will also continue to remain at the forefront of investor priority. Businesses are increasingly demanding embedded finance and customized financial services as they integrate new forms of finance into their business models. The pandemic accelerated this long-term shift marked by the emergence of large tech companies into the financial services industry. Additionally, the demand for sustainable investments will continue to impact the Asset and Wealth Management industry. The signature of an unprecedented agreement at COP 26 marks the shift towards net-zero emissions, in which financial institutions have a large role to play supporting government and companies.


Finally, private equity will continue to impact M&A notably in the insurance sector as well as through the acquisition of distressed assets still affected by the pandemic. Insurtech will be of high interest for private equity firms looking to invest in technology capabilities all while growing their client base.


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