Strategy takes centre stage as ANZ financial services M&A slows

Financial services M&A dips in first quarter

It’s been a slow start to the year for financial services deals, according the latest Indicators data from the Ansarada Deals platform. Deal-making activity within the sector dipped 25% quarter-on-quarter (QoQ) in the first three months of calendar 2024. Capital raising by financial services firms dropped by 29% in the same period as activity slowed.

One of the primary challenges M&A activity has faced within the Australia-New Zealand region has been a slowdown in economic growth at a time when business costs (notably wages) are continuing to rise. This combination of factors has left many businesses facing an uncertain future, and data shows that bankruptcy and insolvency are on the rise.

Despite these challenges, several indicators suggest that some heat remains in the market and that activity may begin to lift in the second half of the year.

Notably, even though Q1 activity dropped on a QoQ basis, it remains up 67% compared to the first three months of 2023.

Year-on-year growth looks even healthier, with new financial services deals growing 74% during the 12 months to 31 March 2024 compared to the previous year. And while we may not see a return to the flurry of activity recorded in 2021, shifting market conditions look set to drive an increase in activity as we head into the second half of the year.

These deals are expected to focus on delivering innovation rather than exclusively targeting growth through acquisitions, and deal valuations are tipped to contract as dealmakers take a more pragmatic approach to navigating the market.
 

Fintech ripe for M&A opportunities

Reflecting what’s happening in the broader financial services industry, the fintech sector recorded a flat Q1 in 2024 (0% change in QoQ activity) – although there was a 50% increase in dealmaking compared to the prior corresponding period.

Private equity is taking a particular interest in this portion of segment of the industry, especially when it comes to B2B fintech companies which have the potential to improve financial service delivery through improved technology.

The increased interest in this sector highlights a larger trend across financial services – namely, a focus on strategic M&A designed to improve organisations’ scale or capabilities to meet changing economic conditions and consumer expectations.

McKinsey notes that fintech acquisitions can provide a pathway to greater scale and capability, especially in light of the sharp devaluation this sector experienced in 2022 which made many of these companies more realistic targets for acquisitions.

However, the company notes that the success of these deals will hinge on how well these deals are structured to preserve the fintech’s value and talent.

Scale and capability benefits in the spotlight

The past few years have seen spikes in both geopolitical and macroeconomic uncertainty. In 2024 alone, close to half of the global population is expected to vote in national elections – with notable campaigns being run in India, the UK and USA.

Meanwhile turmoil in Ukraine and the Middle East continues pose geopolitical threats to markets, though the impact of these conflicts has so far remained relatively contained.

Consumer behaviour has also shifted in concert with these economic rumblings. Cost of living pressures mean customers across Australia and New Zealand are increasingly concerned about their financial wellbeing.
To meet these challenges, banks and financial services institutions need to transform their business models. This has so far been a two-speed process:

• Businesses delivering strong returns are using acquisitions to generate growth and provide new services to customers.
• Less profitable businesses are considering divesting from non-core markets to raise profits and reposition themselves within the market.

This is in-line with predictions made by EY at the end of 2023 that ‘forward-thinking’ financial institutions will focus on M&A journeys they can embark on in the near term to bolster them over the longer term.

“From an M&A perspective, this means translating their roadmap into tactical and strategic opportunities on the buy-side and the sell-side to drive long-term value creation,” the consultancy said.

Ansarada’s data suggests that this trend will continue to drive activity in 2024, with both McKinsey and EY holding similar positions.

Financial services M&A ‘hot spots’

Given these dual drivers of scale and capability, it’s likely that M&A activity will centre on specific ‘hot spots’ within the industry, such as fintech.

Another likely area of focus is asset and wealth management. This segment of the industry is an obvious choice for businesses looking to achieve greater scale. In January, there was a flurry of deals within this space across Australia.

Other hot spots are expected within payments and specialist financial services as businesses look to scale up and increase their margins. Meanwhile, insurance may become a target for divestitures as companies look to exit their more complicated legacy insurance portfolios and redesign their capital structure.