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European financial services M&A sees third quarter slowdown in third quarter

8 Dec 2011

European financial services M&A activity saw a significant slowdown during the third quarter of 2011, according to new research.

PwC said it believes a number of specific financial services markets and sectors will remain relatively active areas of M&A during late 2011 and the early part of 2012. The value of European financial services M&A activity during the third quarter of 2011 was €5.0bn, 25 per cent lower than the prior quarter’s figure of €6.7bn and 76 per cent lower than the comparable figure of €21.2bn recorded in the third quarter of 2010.

Total deal values for the second and third quarters of 2011 are the lowest recorded in the history of PwC’s nine-year dataset. Small and mid-market deal activity declined steeply with transactions valued at less than €1bn totalling just €2.6bn, compared with €5.5bn in the previous quarter. The European sovereign debt crisis and the underlying market volatility have played significant roles in keeping transaction volumes low during 2011, PwC said.

The most obvious problems are uncertainty over the immediate outlook, and a lack of confidence in the financial markets as a whole and financial services as an industry. “M&A is always affected by levels of confidence among managers and investors”, said Nick Page, a transaction services partner at the firm. “The senior management of many financial institutions across Europe are rightly preoccupied with problem-solving and other urgent priorities and so cannot give much attention to strategically focused M&A.”

Even when M&A remains on the agenda, heightened perceptions of a target’s potential exposure to credit or liquidity risks are seen to be cooling bidders’ enthusiasm. “Executives also fear that board members and investors are less likely to forgive a failed deal in the current market environment”, he added.

PwC estimates that non-core assets in the European banking sector are worth more than €1.3tn. Even if these disposals are spread over a decade, portfolio transactions represent a significant source of deal flow with banks in Spain and the UK having the greatest potential to generate sales during the coming year, followed by Germany and Ireland.

Fredrik Johansson, transaction services director at PwC, said, “Despite the undoubted difficulties of deal-making in the current environment, we believe a number of specific financial services markets and sectors will remain relatively active areas of M&A at the end of 2011 and in 2012.

Page adDed, ““The need for banking sector restructuring remains the central driver of European financial services M&A. If anything, the eurozone crisis is only strengthening this rationale. The Euro Summit decision in October to launch another estimated €200bn of bank recapitalisations is a reminder of how far many European banks still need to go to reach stability and sustainability.”

“Most European banks are sharpening their strategic focus to concentrate on fewer, stronger activities. Improving efficiency is an important goal, but the most pressing factor is the need for capital. The requirements of Basel III are bringing greater urgency to the non-core disposals that many banks have been pursuing since early 2009.”

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