• One in three of organisations in financial services sector say focus of M&A activity is now on divestments
  • Focus is on dealing with new regulations, tightening portfolios and retrenching to core activities
  • However, complex deals can take up to two years to complete
  • 20-year trend of integrating businesses has resulted in significant issues when separating

A new report has revealed how increasingly difficult it is becoming for companies in the financial services sector to sell a business. The international study from Eversheds law firm, Streamlining for Success, highlights the difficulties businesses are facing at every stage of the divestment process.

The findings come at a time when there is a greater focus on divestment activity. One third (30%) of respondents in the financial services sector said their M&A strategy was solely focussed on divestments.

However, the study examines how changes in the commercial and regulatory landscape have made deals less certain and more complex, with divestments taking longer to complete. Compared to other markets, the financial services sector reported the longest time to complete a deal, with an average deal time of just under a year for a standard deal – twice the average across all industries.

The study reveals the main driver of a divestment for the financial services sector was regulation. Just under half (44%) of respondents said that tighter regulation had led to a change in how they were preparing assets for sale. Furthermore, sellers were now placing more emphasis on finding buyers they could trust, rather than those offering the highest price.

Enhanced regulatory scrutiny was not the only factor stretching M&A timelines. Respondents noted a growing gap between vendor and buyer valuations and reported that they were now conducting a much more rigorous pre-sale review of assets to address this disconnect and mitigate the threat of price reduction.

Motivating and retaining key staff during a divestment was also highlighted as a key issue for the financial services sector. The growing tendency to deal with smaller or less familiar buyers meant that respondents were particularly concerned that employees at all levels would view the prospect of being transferred to a smaller outfit as an incentive to jump ship to another multinational.

Respondents from all market sectors reported operational separation – including IT – as one of the main problems they now face, but the complicated and interlinked nature of banking and finance institutions meant this was a particular challenge for the financial services sector.

Simon Waller, head of the finance group and partner at Eversheds law firm, said:

“Put simply, breaking up is becoming much harder to do. Separating assets is increasingly complicated in the financial services sector due to the centralised nature of many organisations. 2015-2017 is likely to see more separations as C-suite executives look for better returns on capital ratios. Many European banks are struggling to make an acceptable return on their cost of capital, so deleveraging and divesting is likely to be a trend, with smaller banks emerging over a period of time. Deal teams must have the opportunity to prepare their businesses for the challenges they face on complicated divestments. This requires a much closer working relationship between the lawyers negotiating deal terms and regulatory clearances, and the operations team executing the commercial transaction and separation plans – a point that came through very clearly from the businesses involved in the study.

“It is clear from the report that businesses in the sector need to look closely at their current processes around managing divestments to ensure they maximise the benefit of such deals, rather than tying themselves up in separation knots further down the line which could have been avoided at an earlier stage.”

Collectively the respondents to the Eversheds study have worked on more than 2,400 M&A deals across 60 jurisdictions during the past five years. Nearly two fifths of these were divestments. Drawing on this vast experience, the study concludes with six key points to increasing deal value and certainty:

  • Adopt a clear and cooperative approach to communicating with the buyer
  • Keep in regular contact with local management at the target company to maintain morale
  • Have clear separation plans, which you share with the buyer
  • Keep a close eye on conflicts of interest
  • Build flexibility into legal contracts
  • Plan for delays
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