OREANDA-NEWS. April 09, 2009. The financial crisis has had a profound impact on patterns of M&A in financial services (FS) across Europe during 2008, reversing many well-established trends in deal activity, reported the press-centre of PwC.

Some of the most notable changes include a steep fall in the value of M&A involving private sector bidders: a shift away from the emerging markets to domestic priorities and a renewed focus on stability and solvency at the expense of top-line growth.

The new report from PricewaterhouseCoopers, “Back to the domestic future: where next for FS M&A in EMEA” also finds that 61% of respondents to the PwC survey, indicated that, with regards to banks, government involvement would constrain M&A activity during 2009.

Michael Knoll, partner, head of M&A lead advisory, PricewaterhouseCoopers, said:

“Deal dynamics have changed tremendously and are now dominated by haste, opportunism and government involvement, the latter of which has dramatically changed the dynamics of European M&A activity, most markedly in terms of the types of transactions that have taken place. Deals are no longer dominated by the desire for increased scale, faster growth, reaching new markets and creating national champions.”

2008 was ‘year zero’ for FS M&A, with levels of activity dropping across Europe. The total value of deals in the European FS sector declined from EUR208bn 2007 to EUR 179bn 2008. The growing trend of governments nationalising or taking strategic stakes in European FS companies accounted for over 50% (12) of the top 20 deals and if state sponsored activity is excluded, total deal values during 2008 decreased by a staggering 65%; this is below the level of European FS deals seen in 2005.

During 2008, government involvement reversed the trend of increasing cross border activity toward domestic deal making. Domestic deals accounted for ?137bn of total deal activity in 2008, up 81% from EUR 76bn in 2007. In 2008 cross border deals accounted for EUR 41bn down 69% from EUR 132bn in 2007. The impact of this has been particularly felt in Eastern Europe and levels of activity have cooled from EUR 11bn in 2007 to EUR 6bn in 2008.

M&A deal activity was heavily biased toward banking in 2008 with deal values rising from EUR 140bn in 2007 to EUR 152bn in 2008. Government involvement accounted for a huge EUR 104bn of this total, the significant factor allowing the banking sector to retain its dominance. The value of transactions involving insurers and asset managers dropped sharply. Insurance saw a decline from EUR 45bn in 2007 to EUR 11bn in 2008 while asset management saw a fall from EUR 13bn in 2007 to EUR 5bn in 2008.

Outlook
56% of respondents to the PwC survey, anticipate M&A appetite to remain at the same level or decrease as we move through 2009, in part, a reflection of the increased trend of government ownership of banks.

The extent of government involvement is anticipated to be a catalyst for some significant strategic reprioritisation in the industry with the mantra for 2009 likely to be restructuring. Divestments and disposals were the driving forces behind many transactions during 2008 and this is set to continue through the year with 87% of respondents believing that financial institutions will be more likely to divest assets, portfolios, businesses and subsidiaries in 2009, than be buyers of new business.

66% of respondents expect the dramatic fall of share prices of banks and financial services companies will lead to greater involvement of Sovereign Wealth Funds and Private Equity as investors in the financial services sector during 2009. Financial Services infrastructure such as transaction processing and payment operations will attract consolidators and private equity backed bidders.

CIS and Russia: shifting trends
Government rescues aside, financial services deal activity continues to slow in the Commonwealth of Independent States (CIS).

In the latter part of 2007 and into early 2008, the credit crunch had not had a massive impact on most CEE markets. Now, however, the whole region is affected by a shortage of liquidity.

Economic growth is slowing, while many banks are being constrained by the scarcity of domestic deposits and by capital shortages among their foreign parents. These and other country-specific factors have triggered state-backed intervention in some countries in the region.

The Russian government has been particularly willing to use its considerable reserves to support the banking sector. The Central Bank of the Russian Federation has been sanctioned to grant unsecured loans to commercial banks for terms of up to five months.

During the years prior to 2007, the region saw intense M&A activity involving foreign buyers, often at high valuation multiples. This activity began to tail off during 2007, as targets became fewer and the early effects of the credit crunch began to be felt. The reduction in regional M&A activity has continued into 2008, with the financial crisis restricting the ability of many potential acquirers to do deals. The slowdown was particularly marked in the final quarter of 2008. Overall, levels of deal activity fell from EUR 10.7 billion in 2007 to EUR 6.3 billion last year with Russia accounting for the majority of deals.

Insurance deals remain rare in the CIS. This is, in large part, a reflection of a high concentration in the Russian insurance market and the lack of potential targets for foreign buyers. There was some banking activity, but far less than in 2007, when several foreign banks entered the Russian market and nine Ukrainian banks were acquired by foreign bidders.

There could now be a potential shake-out of financial services ownership in the region. Resource-rich European economies, such as Russia, will continue to invest in Europe. In the long term,CIS countries beyond Russia and Ukraine are likely to become more open to foreign direct investment. We expect to see growing deal activity during the coming years in the larger CIS markets of Belarus, Azerbaijan, Turkmenistan and Uzbekistan.