Until 2018, the impact of the financial crisis of 2007-08 was visible in the US banking sector. Banking mergers and acquisitions had become limited, and the sector struggled to grow. However, in 2018 banking M&A witnessed recovery and prepared for substantial growth over the following years. In early 2020, this growth was suddenly interrupted by the advent of the COVID-19 pandemic.
As industries across the world attempt to recover from the aftermath of the COVID-19 pandemic, experts forecast growth for the recovering banking sectors across the world as well. Banking M&A has recently become crucial due to the increasing need for investment in technology and digital capabilities, and the various regulatory changes. Prior to the pandemic, consolidation had recovered to levels that were last seen before the financial crisis.
After the initial staggering impact of the pandemic, all industries have started preparing for recovery and are attempting to adapt to the new normal of the post-COVID era. Similarly, banks are on the path to recovery, and M&A is one of the most effective and crucial ways to recover successfully. Banking M&A is a challenging process and requires appropriate planning and unparalleled M&A strategies.
In this article, Infiniti Research experts discuss the impact of the COVID-19 pandemic on banking M&A. Additionally, as banks return to banking M&A with renewed motivation, it is important to be aware of the potential challenges, and the ideal way to approach this process and the difficulties encompassed. Therefore, this article details the significant upcoming challenges and the role of appropriate M&A strategies, as highlighted and discussed by Infiniti’s M&A support experts.
Attempting to recover from the aftermath of the COVID-19 pandemic through banking M&A? To learn how Infiniti’s M&A strategies can help you assess, identify, evaluate, and choose the ideal consolidations, request a FREE proposal.
Impact of COVID-19 on Banking M&A
With the rising number of cases in the United States and declining GDPs worldwide, all industries suffered substantial losses. Similarly, banking M&A saw a rapid decline in valuations and total shareholder returns. Additionally, boards and CXOs have shifted their focus to maintaining business continuity and stabilization of current businesses.
Further, the uncertainty of capital flexibility and losses, and the duration of the economic pressure has made M&A unappealing to buyers. In the instance of major distress due to factors such as capital pressure or material risk of failure, struggling organizations may need to sell. Apart from extreme measures, however, selling is not the ideal option in a struggling economy.
However, as banking M&A increases, several trends are expected to surface. For instance, the rising need for fintech and digital capabilities, accompanied by the potential lack of funding for new fintech firms with limited market experience, may promote consolidation between traditional financial institutions and fintech firms. Additionally, the sudden upsurge in demand for digital platforms in every industry due to the pandemic will promote the need for banks and fintech companies to consolidate.
As these and other market trends begin to influence the recovering market, banking M&A is expected to recover within 2020 marginally. However, the COVID-19 pandemic will have a lasting impact on the foreseeable future of the banking sector.
Speak to our experts to know more about the impact of COVID-19 on your industry, the ideal path to recovery, and adapting to the new normal.
What companies need to prepare for during Banking M&A
As the banking sector starts on the path to recovery, the banking M&A process is set to face various challenges and opportunities. Although there will be a steady increase, the industry is expected to take a substantial amount of time before it has made a complete recovery. After a sudden impact like that of the COVID-19 pandemic, banks and fintech firms should be prepared for various factors in banking M&A to ensure successful transactions and avoid further losses.
Therefore, Infiniti’s M&A strategy experts identified the following four crucial factors for banking M&A participants to prepare for:
Staying Ahead of Regulations
Changing political, social, and economic environments have previously posed substantial challenges for the financial and banking sectors. As 2020 proceeds, the political and economic scenario of the US continues to be precarious, and that directly impacts the regulatory environment of all industries. In the case of the banking sector, particularly, potential political regime changes can easily alter the future of all industry players and M&A transactions.
When strategizing for M&A transactions, participants need to prepare for possible regulatory changes and the impact of a new political regime on the economic environment. Additionally, choosing a partner that will be beneficial and supportive through changing factors is highly crucial and contributes significantly to a successful M&A. Therefore, key players have recently shifted their focus to acquiring professional assistance in developing M&A strategies. This helps ensure effective and successful strategizing and implementation of consolidations.
Accepting the New
The need for technological and digital capabilities has increased substantially over the last decade. Industries and consumers have become increasingly dependent on technology to carry out all major commercial transactions and activities. This has created the need for traditional financial institutions to consider and execute consolidations with financial-technology (fintech) firms. With increasing M&A transactions between traditional banks and fintech firms, the banking sector is headed on a path to digitization. However, although it is widely accepted that it is time for banks to shift from their legacy systems to modern fintech is necessary for survival and proliferation, many institutions struggle to make the change.
As the term legacy suggests, these systems are highly dated and a core part of the traditional banking systems and brand identities. However, they no longer fulfill the requirements of the modern consumer. Therefore, traditional financial institutions must prepare to consolidate with their agile fintech competitors and accept the new wave of technology. Adapting is crucial to survival, and changing to modern, adaptable, and consumer-centric systems is one of the essential changes for the banking sector.
Understanding Cultural Integration
During integrating, two independent organizations, boards, and CXOs often fail to account for the impact on their employees. This has led to a high failure rate in banking M&A in the best. Therefore, as companies work towards new M&A transactions, it is crucial to account for employee sentiment towards the consolidation process and ensure clear communication with all company employees. The right M&A strategy helps banks clearly communicate with and adequately train their employees for the new changes in the organization.
It is also important to ensure that employees on both sides of the deal agree with new policies regarding compensations, benefits, and organizational culture. Ensuring appropriate cultural integration can make or break an M&A. Proper cultural integration helps increase employee satisfaction and promotes efficiency and productivity. In some cases, organizations create an integration management office, with an integration CEO that helps manage every segment of the integration process, ensuring appropriate cultural and employee integration.
A Slow Path to Recovery
Although banking M&A is expected to recover through the remainder of the year, this process will be long-drawn and limited for a certain period. Currently, the scale is critical, and many struggling financial institutions and fintech firms will require M&A transactions to survive through the pandemic.
However, the economic impact of the pandemic has sent tremors through various segments of the banking and financial services sector, leading to an increased focus on short-term business continuity and reduced attention towards major investments such as M&A transactions. Therefore, companies must prepare for a slow and steady recovery and the possibility of limited options and partnerships. The right M&A strategies can help banks and fintech firms identify and execute the ideal M&A transactions even in a slow market.
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How the Right M&A Strategies Can Help in Banking M&A
As financial institutions enter this phase of recovery, and banking M&A makes a long-awaited return, M&A strategies can be the major difference between successful and unprosperous consolidations. Infiniti’s experts help financial institutions overcome the challenges of banking M&A while maintaining business continuity and enabling a successful merger.
Three ways in which Infiniti’s M&A support and M&A strategies can help financial institutions in these challenging times are as follows:
- Organizations can create systematic and programmatic approaches to the process and enable the continuous development of potential M&A candidates.
- Boards, investors, and CXOs are offered data-driven insights and advice through the M&A process, with unparalleled guidance and research support.
- Financial institutions can assess all potential opportunities, identify the ideal partnerships for their organization, and make well-informed decisions about their future.
Recovering from the COVID-19 pandemic is expected to be a long-drawn and challenging process for all industries. However, with the right assistance and guidance from Infiniti’s M&A support experts, financial institutions can develop and execute successful M&A strategies that will boost the recovery process of their organization and the financial services industry.