Financial services hunt for M&A amid strong balance sheets

Financial services leaders are “all cashed up with nowhere to grow” when it comes to M&A activity, according to Deloitte. 

The firm’s 2024 Deals in Focus-Heads of M&A report surveyed 130 Australian firms, 14 per cent of whom specialised in financial services. 

This found, overall, Australian firms are bullish in the year ahead with sound economic fundamentals, strong balance sheets and an appetite for growth.

But nowhere is this clearer than in the financial services sector, it said, where no financial services leaders said they were concerned about their balance sheets.

While 68 per cent of leaders overall said they were “highly confident” that their balance sheets were strong with adequate cash reserves, this number rose to 90 per cent of those working in financial services. A further 10 per cent were “moderately confident”.

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There were also no financial services leaders who were doubtful about growth opportunities in their sector, and 48 per cent said they expect the number of deals to increase, double the percentage last year when appetite was muted in a post-COVID environment.

“M&A leaders in financial services are cashed up, confident and looking to double their deal volumes,” the firm’s report stated. “They’ve got a ticket to play in M&A, now it’s a matter of where.” 

Earlier this year, Pacific Current explained the firm was “flush with cash” after enacting multiple divestments in the last financial year. This included the sale of its stake in GQG Partners, the sale of minority interests in Proterra, Cordillera and Avante, and the sale of its stake in Carlisle Management Company. 

Chair Tony Robinson added: “This has left us with significant cash holdings and significantly more cash than we can deploy in a reasonable time and in a time frame which would see us able to generate returns on our assets that are appropriate for our shareholders.”

The main reason that financial services deals are being approached is to fill capability gaps through a strategic acquisition or a partnership that will allow them to access new customers or technology, Deloitte said.

This ties into findings by Morningstar that active asset managers will need to diversify their product ranges into niche areas such as alternatives if they wish to compete with cheaper, passive players, a tactic most firms are enacting via M&A. 

Recent moves in Australia include Magellan taking a 29.5 per cent strategic stake in systematic equity manager Vinva, GQG Partners taking minority stakes in three private markets firms from Pacific Current, and HMC Capital acquiring private credit provider Payton Capital.

But while they may say they have more cash to spend, leaders are hesitant over whether they can come out on top over their other competitors and successfully enact an acquisition. 

Just 19 per cent said they were highly confident that they could find a suitable target at an attractive valuation, and only 28 per cent said they were highly confident that they could offer a strategic advantage over other bidders.

Deloitte warned: “Money and strong balance sheets cannot guarantee transaction success in a market with limited avenues for organic growth and fierce competition for inorganic opportunities, including strong private equity interest.

“To address this, organisations should focus on identifying capability gaps and exploring strategic acquisitions or partnerships to gain access to new customers, technology, products or capabilities.”

The firm recommended financial services leaders ensure they have a clear strategy, tailored messaging for different stakeholder groups, ensure they understand the capabilities and gaps, and effectively communicate their value proposition with their stakeholders. 

This should include outlining the full cost, expected synergies, rationale behind the price, use of proceeds and timeline for earnings accretion.