‘Cashed up and confident’: Financial services M&A fiercely competitive

Mergers and acquisitions in the financial services industry are expected to continue surging, two reports from Deloitte and PwC project.

Deloitte’s paper titled, The Deal in Focus: Heads of M&A Survey 2024, interviewed M&A leaders from 130 firms across Australia, including financial services companies such as fund managers and wealth managers.

It revealed that inorganic growth strategies are set to double in the year ahead for financial services firms in comparison to last year. Some 48 per cent of organisations in the field expect to see or pursue a higher number of deals over the next 12 months, up from 22 per cent in 2023.

This is largely due to firms’ optimism in their balance sheets, Deloitte found. A significant 90 per cent of M&A leaders surveyed from financial services are highly confident their balance sheets are strong and cash reserves are good. Moreover, 100 per cent of financial services participants surveyed are confident there will be growth opportunities in the sector.

Of those pursuing deals, the overwhelming majority (86 per cent) are interested in acquisitions, 62 per cent in M&A alternatives, such as partnerships and strategic alliances, and 33 per cent in divestitures.

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“M&A leaders in the financial services sector are cashed up, confident, and looking to double their deal volumes, despite squeezed margins, intense mortgage market competition, and rising funding costs,” the report stated.

Commenting on the findings, James Chown, partner in Deloitte's financial services M&A practice, said: “M&A leaders in the financial services industry are seeing increasing opportunities in the year ahead, expecting to double the number of deals they look at over this period.

“However, with fierce competition for growth in many parts of the industry, finding the right deals and getting them done may be challenging. The key is proving you’re the advantaged acquirer and being ready to go.”

When it comes to sealing the deal, just 28 per cent of M&A leaders said they feel highly confident in demonstrating a strategic competitive advantage over other buyers. To be a successful acquirer in a highly competitive market, the report encouraged organisations to focus on filling capability gaps through strategic acquisitions or partnerships to access new customers or technology.

“Organisations need to have a clear strategy, understand their capabilities and gaps, and effectively communicate their value proposition to stakeholders,” the report continued.

Another big four professional services firm, PwC, has found that there is a “pressing need” for financial institutions to transform and drive profitability which should give dealmakers greater optimism in the year ahead. 

In its Australian M&A Outlook 2024: Financial Services Industry Insights, the consultancy firm said there was a greater emphasis on businesses achieving “scale”.

“Market conditions are creating cost pressures for the financial services sector. While margin compression may stifle M&A activity in the immediate term, future-focused financial institutions see profitability pressures driving the need to transform, reinvent and scale their business models to remain viable in the long term,” the firm wrote.

While M&A volumes in financial services were subdued in 2023 compared to the previous year (221 completed deals in 2023 versus 257 in 2022), PwC expects the year ahead to see the industry focus on growth as major institutions have largely completed their divestment programs of non-core businesses. 

It also flagged the risk-focused and highly regulated nature of financial services meant deals are likely to be smaller than mega-deals in other sectors.

“Ultimately, organic growth faces challenges in the current market, making growth through mergers, acquisitions, or takeovers an increasingly attractive option in the race for scale.”