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Freeman & Co reports mixed year so far for financial services M&A activity

Tuesday, July 01, 2014
Opalesque Industry Update - In the first half of 2014, M&A activity was mixed across financial services sectors. Acquisitions of Broker-Dealers increased 25% compared to 1H 2013, while acquisitions of Financial Technology firms increased 45%. Acquisitions in Asset Management declined 36% in 1H 2014 compared to a very strong 1H 2013 for deal activity. The number of Private Equity transactions in financial services declined 41% in 1H 2014, although the aggregate deal value of transactions increased by 46% year-over-year.

In Financial Technology, deal activity in Transaction Processing & Banking Systems was up 107%, driven by heavy startup activity in payments, peer-to-peer lending and crowd funding platforms; Asset Management Technology deal activity increased 92%, with fund administration consolidations and growth in the online wealth management space leading the way. Within the Broker-Dealer sector, there has been a steady increase in Research, Sales & Trading deal activity, as well as in Institutional Electronic Trading and Retail Online Brokerage Platforms. Following a high volume of large, transformative Asset Management transactions occurring in the preceding few years, deal activity declined from 1H 2013 to 1H 2014, as firms have focused on building scale through product gaps, especially in growth areas such as liquid alternatives, smart beta and niche exchange-traded products.

"So far 2014 has been an active year in financial services M&A, with signs of continued acceleration. Strategic acquirers are now looking to fill product gaps and pursue growth areas more aggressively. With shareholder demand for EPS growth, we expect strategic buyers to expand their M&A footprint materially over the next two years,” says Eric Weber, Managing Director and COO of Freeman & Co. LLC.

KEY DRIVERS OF FUTURE M&A

Looking ahead to 2H 2014 and beyond, Freeman & Co. projects the following M&A drivers:

Asset Management

- With only 48 asset management transactions announced year to date, we expect transaction activity to remain flat during the remainder of 2014 due to the high volume of deal activity during 1H 2013

- Fee pressures continued to drive M&A activity in 2014 as smaller firms seek to remain competitive and large asset managers continue building upon their scale advantages through buy-side searches for targeted product gaps

- Shifting investor preferences have created a market opportunity for investment solutions which address needs for diversification, asset allocation, and downside protection which will drive demand for firms providing liquid alternatives, smart beta and niche ETPs

Broker-Dealer

• Diversified middle market brokerages continue to take lead consolidation activity and roll up smaller competitors to round out their product, industry and geographic offerings, while large banks continue to be hampered by regulatory issues and capital constraints

• We expect increased M&A activity in the advisory boutique and institutional equity sales & trading space as these areas have higher growth potential than firms in the institutional fixed income space

• The successes of boutiques in 2013 and 1H 2014 from a growth and profitability standpoint has translated into a healthier pricing/deal environment than the post-crisis period of 2008-2012 


Financial Technology

• Asset Management Technology deal activity has been boosted by two areas:
– Fund administration and asset servicing transactions as consolidation continues and banks 
grow less capital-intensive asset servicing businesses
– Growth in online wealth management platforms which take advantage of a generational shift in how retail investors interact with financial advice

- Transaction Processing & Banking Systems deal volume has been driven sharply higher by heavy startup activity in p2p lending, crowd funding, mobile payments/apps and Bitcoin-related startups, trends which will likely keep deal volume strong through 2014

Private Equity

- Private equity deal activity in financial institutions (FIG) has been relatively consistent in 2010, after a spike in 2005-2007 and a subsequent dip in 2008-2009

- Exits by private equity firms continue to outpace entries, as firms harvest portfolio companies acquired in the pre-crisis period, and as strategics have become acquisitive

- FIG represents a smaller share of the overall PE pie as it did in 2008-2009, when PE firms were actively involved in bank rescues

There continues to be significant excess uncommitted capital among PE firms – this, coupled with a relatively healthy deal environment in all sub-sectors within FIG, should allow for total activity to reach close to $50 billion this year – the highest level since 2007 


1H 2014 DEAL ACTIVITY HIGHLIGHTS

Asset Management

• The global number of asset manager acquisitions decreased to 48 deals in 1H 2014, a 36% decrease from 75 in 1H 2013, however deal activity in 1H 2014 outpaced 2H 2013, when 45 transactions were announced

• Asset management transactions announced in 1H 2014 represented $1.1 trillion of assets under management (AUM), a decrease of 8% from the 1H 2013 figure of $1.2 trillion; full year 2013 had transactions involving $1.8 trillion of AUM

• Despite several blockbuster transaction announcements during the first six months of the year, the number of large deals, involving over $10 billion in assets under management, decreased to 14 in 1H 2014 from 20 in 1H 2013, a 30% decrease

• Mid-sized deals, involving $1-10 billion in AUM, experienced a significant decline during 1H 2014 with only 25 deals announced year-to-date, a 46% decrease from 46 in 1H 2013

• There were 34 announced transactions involving U.S. firms in 1H 2014 and 20 announced transactions involving European firms, decreases of 19% and 31%, respectively, compared to 1H 2013

Broker-Dealer

• The number of transactions involving broker-dealer targets globally increased to 106 in 1H 2014 from 85 in 1H 2013, with the total value of transactions also rising from $2.4 billion to $3.5 billion over the same time period, a 46% increase. On an annualized basis, the number of transactions stands 13% higher than 2013, while the total transaction value is down 10%

• The majority of the pick-up in deal activity stemmed from North America and Europe, with 56% and 53% rises in the number of deals compared to 1H 2013, respectively. The number of deals with Asian targets declined slightly in 1H 2014, down 17% from 1H 2013 and 24% on an annualized basis

• Acquisitions of research sales & trading firms, institutional electronic trading platforms, diversified firms and online retail brokers are all on pace to exceed 2013 transaction levels 


Financial Technology

• Acquisitions of Financial Technology companies increased in 1H 2014 to 240 announced deals from 165 in 1H 2013, a 45% increase

• The Asset Management Technology sector increased significantly with 25 announced deals in 1H 2014, up from 13 in 1H 2013

• Transaction Processing & Banking Systems also experienced a sharp uptick in activity, as 120 deals were announced in 1H 2014, up 107% from 58 transactions in 1H 2013


Private Equity

• The total number of private equity transactions (entry and exit) involving financial institutions was 37 in 1H 2014 compared to 63 in 1H 2013, a 41% decrease

• Total transaction value, however, was $17.9 billion in 1H 2014, significantly up from $12.3 billion in 1H 2013, with each sub-sector within financial services experiencing an increase in deal activity

• The largest transaction of 1H 2014 was KKR’s purchase of Sedgwick Claims Management Services from Hellman & Friedman and Stone Point Capital for $2.4 billion 


About Freeman & Co. LLC 
Founded in 1991, Freeman & Co. has diversified into one of Wall Street’s premier providers of independent financial services advice offering mergers and acquisitions and related advisory services, capital raising, underwriting, strategic management consulting and competitor benchmarking data and analysis to the entire spectrum of financial institutions. www.freeman-co.com

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