Editor’s Note: This post contains excerpts from Wachtell, Lipton, Rosen & Katz’s Guide: “Financial Institutions M&A 2024: Seizing Opportunities, Navigating Pitfalls,” the full version of which is available here.
by Ed Herlihy, Richard Kim, Nick Demmo, David Shapiro, Matt Guest, Mark Veblen, Brandon Price, and Jake Kling
Top left to right: Ed Herlihy, Richard Kim, Nick Demmo, and David Shapiro
Bottom left to right: Matt Guest, Mark Veblen, Brandon Price, and Jake Kling
(Photos courtesy of Wachtell, Lipton, Rosen & Katz)
KEY TRENDS IN FINANCIAL INSTITUTIONS M&A DURING 2023
I. M&A FALLS FOR A SECOND CONSECUTIVE YEAR OWING TO GEOPOLITICAL, MACROECONOMIC AND REGULATORY FACTORS
Financial institutions M&A fell for the second year in a row in 2023. Like most other sectors of the economy, financial institutions faced significant M&A headwinds during the year, including geopolitical instability, elevated inflation, high interest rates, challenging and often volatile equity markets, enhanced antitrust risks and uncertainty, and recessionary fears that softened only towards the end of the year.
Deal values announced in 2023 across fintech, insurance underwriters, broker-dealers, speciality lending and banks and thrifts transactions all fell relative to 2022, which was already a significant down year for financial institutions M&A. There were, however, some sectors of the financial institutions space that were more positive. While the investment management space saw a decline in deal volume, deals measured by transaction value rose—although total deal value for all 2023 transactions in the aggregate was less than the deal value of BlackRock’s January 2024 deal for Global Infrastructure Partners. Wealth management likewise continued as a bright spot for M&A as multi-year consolidation continued, funded in significant part by private equity. Insurance brokerage transactions likewise saw continued execution in keeping with ongoing consolidation trends.
Within the banking sector, the headwinds were especially stiff. Falling valuations for balance sheet assets resulting from rapidly rising interest rates made the merger math for many potential deals challenging if not impossible given the requirement to mark to market the target’s balance sheet. Falling valuations contributed significantly to the successive failures of Silicon Valley and First Republic and the stock price pressures seen across much of the industry. The March bank failures and resulting FDIC transactions were the only bank M&A “highlights” of 2023, and only for the winning bidders in FDIC transactions—not for the several banks that for a time appeared at risk of following them into failure or for the remainder of the industry, which is largely still working to recover from the March trading price declines and grappling with a more challenging regulatory supervisory environment that arose in response to the bank failures.
And even where the bank merger math could work, potential partners faced continued uncertainty regarding the federal regulatory approval likelihood and timeline. While Bank of Montreal obtained its approval for the $105 billion asset Bank of the West transaction in roughly one year, right on the heels of the similarly timed U.S. Bank/Union Bank approval, TD/First Horizon announced the termination of their pending transaction in early 2023, 14 months after announcing the transaction, due to their inability to obtain regulatory approval—a somewhat surprising result in the midst of the March bank failures and the market turmoil at the time. Following the March banking crisis, federal bank regulators indicated an openness to bank consolidation under the right circumstances as evidenced by their prompt approval of the PacWest/Banc of California transaction and approval of the acquisition of a majority of TIAA Bank by a consortium of private equity investors; however, these data points failed to reverse a general perception of regulatory uncertainty and risk.
II. OUTLOOK FOR STRATEGICALLY OPPORTUNISTIC M&A IN 2024 HOLDS PROMISE
Looking forward, there are reasons to hold out hope for an uptick in transactional activity (with Capital One’s landmark $35.3 billion acquisition of Discover announced shortly before publication of this volume serving as a prominent example). The United States has managed to avoid a recession, and the market anticipates the Federal Reserve cutting the federal funds target rate multiple times in 2024. Lower rates and the passage of time have already helped to improve the merger calculus for dealmaking, particularly for bank transactions and private equity portfolio company transactions. Of course, nothing is certain with the current level of geopolitical instability, the risk that inflation could prove more stubborn than expected, ongoing regulatory uncertainty around approval criteria and pending rule making, commercial real estate risk, caustic election year politics, regulatory and supervisory considerations, and a decidedly challenging antitrust environment, but consolidation is needed throughout the financial services industry, financial sponsors have significant dry powder, and there is significant pent-up demand for deals generally.
* * *
Ed Herlihy, Richard Kim, Nick Demmo, David Shapiro, Matt Guest, Mark Veblen, Brandon Price, and Jake Kling are Partners at Wachtell, Rosen, Lipton & Katz. David S. Neill, Lawrence S. Makow, Jeannemarie O’Brien, Joshua M. Holmes, Damian G. Didden, Mark F. Veblen, Raaj S. Narayan, Eric M. Feinstein, Steven R. Green, Meng Lu, Amanda K. Toy, Rosemary Spaziani, David M. Adlerstein, Matthew T. Carpenter, Ahsan M. Barkatullah, Yasmina Abdel-Malek, and Fabiola Urdaneta also contributed to the guide, which is available here and was first published on the firm’s website.
The views, opinions and positions expressed within all posts are those of the author(s) alone and do not represent those of the Program on Corporate Compliance and Enforcement (PCCE) or of the New York University School of Law. PCCE makes no representations as to the accuracy, completeness and validity or any statements made on this site and will not be liable any errors, omissions or representations. The copyright of this content belongs to the author(s) and any liability with regards to infringement of intellectual property rights remains with the author(s).