The report: Global M&A Report 2024 (January 2024)
Source: Bain
Executive Summary
Bain’s latest annual M&A report offers both solid insight into M&A activity last year and outlines what the global management consulting firm predicts for 2024. In 2023, the overall M&A market dropped 15% to $3.2 trillion, its lowest level in a decade. Deals were delayed for many reasons including high interest rates, mixed macroeconomic signals, regulatory scrutiny and geopolitical risks. Additionally, many frequent acquirers used 2023 as an opportunity to expand their competitive advantage through M&A.
The 120-page report spans many industries, including the two sections are notable to the financial services industry: banking and payments. The overall financial services industry saw a 23% reduction in deal volume in 2023 compared to 2022. In the banking industry, those engaging in M&A did so either to secure themselves or position themselves for growth. Meanwhile, fintechs and payments companies sought deals to expand their reach or unlock value. Given that many of the same conditions from last year remain — like high interest rates, macroeconomic volatility and regulatory uncertainty — this year’s M&A picture may mirror last year’s.
Key Takeaways
• In the first three quarters of 2023, deal value in banking fell by 36% while volume dropped by 21%.
• Bank failures of 2023 sent a warning signal to the industry and spurred activity that otherwise would not have been possible in an environment of increased regulatory scrutiny. Banks responded in two ways: divesting noncore assets to strengthen balance sheets and acquiring capital-light assets like wealth management.
• Given ongoing regulatory and macroeconomic uncertainties, Bain forecasts few big consolidation deals in 2024 and instead predicts divestitures to strengthen the core and acquisitions for new engines of growth.
• Payments companies are cherry-picking assets in capability deals to advance the industry’s evolution. More incumbents want to separate their payments business to create standalone entities that trade at higher multiples.
What we liked: Covering nearly every major industry across the global economy, Bain’s report is a comprehensive and well-respected source on the pulse of M&A activity.
What we didn’t: It’s understandable — as Bain covers a lot of ground here and can only scratch the surface of most industries — but the banking and payments sections of the report could use more detail.
Why we picked it: Now in its sixth year, Bain’s annual Global M&A Report surveys hundreds of M&A executives to learn about the state of mergers and acquisitions. The report’s sections on banking and payments offer interesting insights into what drove M&A in 2023 — and what we can expect in 2024.
Banking: The Three Waves of Deals
A year of bank failures and headwinds: Several high-profile bank failures — including Silicon Valley Bank, First Republic Bank, Signature Bank, and Credit Suisse —set a bad tone for M&A in the banking sector in 2023.
Waves of deal activity: There were three waves of deal activity in 2023. The first was the result of bank failures. For example, First Citizens BancShares bought the commercial and private banking business of Silicon Valley Bank. UBS acquired Credit Suisse and JPMorgan Chase purchased First Republic. After the turbulence, some banks divested noncore businesses to clean up their balance sheets. For example, PacWest Bankcorp sold its property lending division and other assets before merging with Banc of California. Other banks turned to M&A to strengthen positions by opportunistically expanding growth areas or adding new capabilities. Deutsche Bank purchased investment bank Numis to expand overseas, while Dubai Islamic Bank purchased a 20% stake in digital bank TOM Group in Turkey.
Conditions remain: Many factors and conditions that led to a decline in deal volume in 2023 remain. For example, lowered valuations mean acquiring firms have less leverage, and sellers are more reluctant to sell. Additionally, the math of doing deals remains difficult as high interest rates depress many banks’ held-to-maturity portfolios, which must be marked to fair value in a transaction.
“In the U.S., we don’t expect more big bank consolidations given the double whammy of regulatory barriers and economic uncertainty. The big caveat could be a continuation of first-wave deals intended to prevent stress or failure. With elevated interest rates, macroeconomic headwinds, and emerging commercial real estate issues, more troubled banks will likely surface over the next 12 to 24 months in the fragmented U.S. banking system. If this happens, expect more deals to be allowed as regulators prioritize soundness and safety over usual regulatory concerns.”
Mixed regulatory messages: Bain also notes that mixed regulatory messages, scrutiny, and lengthened approval processes hamper M&A. For example, while Janet Yellen signaled an openness to deals in the aftermath of bank failures, the U.S. Department of Justice indicates greater scrutiny for banks with possibly more onerous requirements for those with more than $100 billion in assets. Within the first nine months of 2023, eight U.S. banking deals had been canceled, a number approaching the 13 terminated deals in all of 2022 and more than the four terminations in 2021.
Looking ahead to 2024: Given the “double whammy” of economic uncertainty and regulatory barriers, Bain doesn’t expect more big bank consolidations in 2024. It also believes elevated interest rates and macroeconomic headwinds will lead to more troubled banks in the next 12 to 24 months. Should this materialize, Bain expects regulators to allow more deals as they prioritize safety over their usual concerns. However, Bain does expect more “second wave” activity to sell assets to strengthen the core and free up capital. Stronger banks may see opportunities to gain scale and find synergy. Finally, this year could bring a rebound in M&A for new engines of growth to acquire new capabilities. Bain believes banks will act on opportunities to purchase assets such as fintech businesses to build new capabilities.
What banks should do: While banks have not historically relied on M&A as a source of strategic growth, they should reconsider that stance to start building the fundamentals for successful deals. This means having capital ready to do deals. Banks with a strong balance sheet can prepare to act quickly when an opportunity to scale presents itself.
Payments: Making Strategic Moves
Overall deal value for fintechs dropped 23%, and deal volume fell 30% over the first nine months of 2023. However, some interesting things were happening beneath the surface.
Geographic and global expansion: Bain notes geographic expansion is occurring in some larger markets. For example, global fintech company Rapyd bought PayU GPO to expand its presence in Latin America and Europe, while France-based Market Pay acquired Polish paytech Novelpay. As the demand surges for digital payments, other deals help companies branch into previously untapped markets such as Uzbekistan.
Adding capabilities: As the financial services moves more from physical cards to digital payments, some companies are also cherry-picking assets that add capabilities like payroll, disbursement to small business services, complementing payments with working capital. For example, Nuvei’s acquisition of Paya was to add integrated payment and B2B capabilities. In credit processing, Marquta expanded beyond debt and prepaid cards by acquiring Power Finance.
Separating businesses: Instead of acquiring businesses, many industry incumbents sought to unlock value by separating their business payments businesses to create standalone entities that trade at higher multiples. For example, Fidelity National Information Services (FIS) divested a majority stake in Worldpay to private equity firm GTCR.
Looking ahead in 2024: Bain believes that investor impatience and the presence of smaller, attractive fintech companies low on cash will lead to greater dealmaking in 2024. Smaller and larger payment companies — many of whom are eager to enhance their innovation capabilities and talent pools — will be more attractive than banks in the coming year. On the other hand, banks are likely to turn to fewer capital-intensive partnerships as an alternative to traditional M&A.