PricewaterhouseCoopers M&A insights report: Continued instability in the financial services industry hampers deal activity

Sovereign funds and private equity step up with capital for cash strapped banks

 


NEW YORK, NY, July 31, 2008 – A flurry of unsettling events in the financial services sector has slowed deal activity in the United States (US) financial services industry. For the first six months of 2008, there were 375 financial services deals (disclosed and non-disclosed), a 29 percent decline in deal volume from the same period last year and a 26 percent drop from the second half of 2007 (Thomson Reuters).

According to PricewaterhouseCoopers' US Financial Services M&A Insights report, there were 1,033 financial services deals in 2007, a slight up-tick over the 2006 level of 993 transactions in spite of the credit crunch in late 2007. As the sub-prime mortgage situation continued to unfold in 2008, the impact was not limited to banking. "Due to the continued volatility in the US market and an influx of unsatisfactory news surrounding banks and mortgage companies, some investors stayed on the sidelines," noted Gary Tillett, leader of the financial services practice within PricewaterhouseCoopers' Transaction Services group. "However, not all investors stayed away. Sovereign funds, foreign or non-US acquirers and private equity firms, for the most part, remained fairly active," Tillett added.

Private equity firms and sovereign funds remained a source of capital for banks strapped for cash. Sovereign funds poured $23.5 billion into US financial services companies in 2007, and three funds injected a total of $10.9 billion into Citigroup and Merrill Lynch during the first six months of 2008.

Foreign interest in the US financial services industry stayed relatively strong, aided by favorable currency exchange rates. During the first half of 2008, there were 37 deals involving foreign acquirers, only three transactions less than the total for the corresponding period in 2007. Tillett portends that both private equity and sovereign funds will likely remain an important resource of liquidity for the latter half of 2008.

Although private equity deal activity in the first half of 2008 was down by 41 percent from the corresponding period in 2007, private equity interest in the banking sector increased from four deals in 2007 to seven in 2008. These investors infused a total of $5.1 billion into US banks, providing the capital banks needed to shore up their balance sheet.

As noted in the 2007 PricewaterhouseCoopers' US Financial Services M&A Insights report, foreign buyers would continue to take advantage of a weak dollar to expand or increase their presence in the US financial services industry. During the first half of 2008, we witnessed financial services companies shedding assets to raise capital. For example Citigroup sold some of its regional banks, divested its loan portfolio and had announced it would unload CitiCapital to General Electric. This trend will continue in the second half of 2008, offering opportunities for acquirers.

“With the sub-par second quarter earnings released by major banks in July, coupled with unsettling press reports about financial services companies, investors' confidence eroded further. However, even in a slow economy, opportunities are available for savvy acquirers and deals are getting done," said Tillett.

M&A Insights is a series of industry reports and insights examining the recent trends that affect M&A. For a copy of the 2007 US Financial Services M&A Insights or other industry insights reports, visit website,  www.pwc.com/ustransactionservices . The Transaction Services group of PricewaterhouseCoopers offers a deal process that helps clients bid smarter, close faster and realize profits sooner on mergers, acquisitions, sales and financing transactions. For companies raising money on US or overseas capital markets, we offer a strategic perspective, practical solutions and a holistic service approach that helps management anticipate and resolve a broad array of transaction, financial reporting, and registration process challenges. Our global network of over 6,000 transaction professionals and more than 500 capital markets specialists operate from 16 US cities and some 90 locations in North America, Latin America, Europe and Asia.

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