What will drive Financial Services deals in 2024? Scale needs to address profitability pressures
In 2024, M&A activity in FS is being driven by a desire to grow core business via scale and capability / technology based acquisitions, which underpin a desire to improve customer experiences and access new (but adjacent) markets.
Market conditions are creating cost pressures for the FS 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.
PwC’s 27th Annual Global CEO Survey 2024 – Australian Insights highlights the extent of pent-up demand for value through deals — with 59% of those responding indicating they plan at least one deal within three years with 34% planning to three or more acquisitions in this timeframe.
How many acquisitions is your company planning to make in the next three years?
Source: PwC’s 27th Annual Global CEO Survey 2024
2024 outlook: Financial Services M&A remains restrained
M&A volumes and values in FS were subdued in 2023, and this appears set to continue as dealmakers remain cautious of changing macroeconomic conditions - particularly interest rates.
Volumes were down 14% (221 deals were completed in 2023, compared with 257 deals in 2022), although this was not too far off the medium-term average (270 deals per year in Australia between 2018-20, albeit with a record-breaking year in 2021).
On the other hand, values halved. FS deals in Australia totalled US$8,320million in 2023—significantly down from US$65,383m in 2021, reflecting a similar trend globally and in the Asia Pacific region.
Australian Financial Services deal volumes and values 2020 – 2023
Source: PwC Analysis - Summary of Global AsiaPac and Australia M&A Trends for 2024 Outlook
The year ahead will see FS institutions focus on growth as major institutions have largely completed their divestment programs of non-core businesses.
Private equity will continue to invest in FS assets, especially non-traditional ones, with a focus on capital-light or less regulated parts of the market. Interest from private capital sponsors is anticipated to increase, especially in market-leading FinTech, and resilient business models with infrastructure-like characteristics.
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.
How to deliver deals that count
Three ways for FS dealmakers to accelerate transformation and create value in 2024:
1. Throw your due diligence window wide open
One thing differentiating FS from the broader market is the way macroeconomic conditions dictate play. To combat this, FS dealmakers can widen their due diligence window beyond the usual three-year period. Want to know, for instance, how a target company will respond to volatile and increasing interest rates as well as emerging defaults? You may need to look almost as far back as the GFC for comparative data.
2. Think strategically about deals
Transactions are an essential part of a carefully considered approach to business model reinvention. Start by interrogating the “why” of the deal. Ask: What is our strategy on core and non-core assets? What’s the best possible combination of investment, acquisitions, and divestments, and are we using capital efficiently?
3. Integration process: Prepare, prepare, prepare
M&A integration is an enterprise-wide process (two enterprises wide, actually), so it’s never too early to prepare. Our recent survey found successful M&A organisations’ (i.e. those reporting strategic, operational, and financial success) invest in integration earlier, with 41% starting long-term operating model planning during deal screening (compared with 27% of other respondents). Much of the value of a transaction is typically attributable to synergies and a successful deal is not complete until the long-term value is unlocked, and the aim of transacting to transform is achieved.
Explore our national findings, plus other industry insights as part of this series
About the data
We have based our commentary on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by the London Stock Exchange Group (LSEG) as of 31 December 2023 and as accessed on 3 January 2024. This has been supplemented by additional information from Preqin, S&P Capital IQ and our independent research. Certain adjustments have been made to the source information to align with PwC’s industry mapping.
Contact us
Partner, Financial Advisory, Deals Financial Services Leader, Sydney, PwC Australia
James Scanlan
Partner, Advisory, Deals Strategy & Operations, Sydney, PwC Australia
Director, Advisory, Deals Financial Services, Sydney, PwC Australia