Tuesday 12 January 2021 12:06 pm

Financial services M&A dips as management shifts priorities

M&A in the UK’s financial services industry dropped amid the pandemic as management’s priority shifted away from deals to the preservation of cash. 

The UK financial services industry announced just 136 deals in 2020 down from 211 in 2019, according to exclusive EY data. 

Deal activity came to a near standstill at the start of the pandemic, with activity resuming only once restrictions had eased over the summer. This was in large part due to management looking to their balance sheet protections and preserving cash instead of M&A. 

“Throughout 2020 it was hoped that market conditions would improve and deal activity would pick up, but we now know that didn’t materialise,” says Tom Groom, UK financial services strategy and transactions leader at EY. 

While the number of deals in 2020 dipped, the value actually rose from £39.8bn to £59.5bn due to the £27.1bn acquisition of Willis Towers Watson by Aon. 

This pushed the value of deals in the insurance sector up from £7.3bn to 46.3bn although the number of deals dropped considerably from 73 to 46. 

The banking sector faced the most torrid year with deal values declining from £30.7bn to £11.9bn within one year despite there being just five fewer deals in the year. 

Paul Pugh, co-head of Eversheds Sutherland’s FSM&A team, is more optimistic about the figures, telling City A.M: “Although a number of processes paused during H1 as businesses adjusted to the pandemic, the figures demonstrate there was a market for ‘quality assets’.” 

“Our experience is that good financial services have hedged themselves against Brexit and this in itself did not materially affect 2020 deal flow,” he adds. 

Large pile of dry powder fuels recovery 

While the raw numbers for deal activity may be discouraging there were some signs of green shoots emerging by the end of the year, which Groom says is “more reminiscent of a pre-Covid environment.” 

“M&A occurs more readily when there is a stable economic platform for strategic decision-making to take place, and with the US election ever, a Brexit deal done, and the prospect of large scale global vaccine rollouts imminent, it isn’t unrealistic to expect sentiment to start to tick up,” he adds. 

The value of deals with UK involvement in the fourth quarter reached its highest quarterly total in five years, according to recent Refinitiv data. Additionally the UK has been the third most targeted country globally this year, after the US and China, accounting for eight per cent of global M&A so far this year.

“There is much talk of the ‘dry powder’ in the system and we expect to see this capital being employed during 2021,” Pugh adds.