While overall mergers-and-acquisitions activity at least held steady in this year’s third quarter, the financial services sector failed to keep pace with the broad M&A trend.
Deal volume within the quarter for U.S. financial firms plummeted 15.8% from the second-quarter level to 1,078 deals. The average deal value was even more subdued, falling by 40.5% to $45.3 billion.
The sluggishness didn’t apply evenly to all three broad financial services subsectors, with banking experiencing notable gains in the quarter. However, significant retractions in the capital markets and insurance subsectors more than negated the banking results.
The overall financial services sector is subject to many of the same economic conditions that have buffeted other companies in recent months, but financial firms can experience these conditions more acutely.
Calling them “the usual suspects,” Jonathan Froelich a KPMG partner, deal and advisory strategy, pointed to interest rates and inflation as key drivers of the tepid M&A arena. “We agree with the consensus view that interest rates will remain high at least through mid-2024, which should discourage transactions by keeping borrowing and operating costs at lofty levels.”
But, Froelich wrote in KPMG’s study report, there’s room for some degree of optimism that deal activity will pick up in the mid-term. One clue is anecdotal: the firm’s client conversations indicate companies “are more actively considering acquisitions and adding to their dealmaking capabilities.” Many clients, he noted, “have completed thematic analysis of a variety of financial services subsectors to proactively plan for deals in early 2024.”
Another factor pointing to a resurgence of M&A activity, Froelich stressed, is “the ongoing need for consolidation across key financial services subsectors of banking, capital markets, and insurance. While market conditions have kept dealmakers on the sidelines, competitive pressures to bulk up or slim down are constant and show no signs of abatement.”
The study report also cited four large initial public offerings in September as a “sign that resistance to dealmaking may be weakening.” Those IPOs were by chip designer Arm, online grocery shopper Instacart, enterprise software company Klaviyo, and specialty drugmaker Neumora Therapeutics.
"While market conditions have kept dealmakers on the sidelines, competitive pressures to bulk up or slim down are constant and show no signs of abatement.”
But to be sure, KPMG’s enthusiasm for the short term is clearly measured. “It’s hard to be optimistic about near-term prospects for financial services M&A,” the report said. The significance of the four IPOs is “that they happened at all,” and they’re not expected to “open the floodgates for a new M&A wave.”