November 6, 2023

M&A: Where Have All the Deals Gone?

With such a focus on growth over the last 12 months across the industry, and that growth not necessarily coming from the market, you would have expected more to have happened on the M&A front. However, taking a step back, there are a number of key reasons for this and some interesting alternative approaches that have been considered all of which could be great news for buyers in the near future.

  1. Interest Rates: with interest rates rising quickly and multi-year fixed rate finance/lease portfolios, unless the seller can guarantee the current funding, the portfolio would need to be refinanced by the buyer at no or even negative margin.

    Also, there is always a period needed for finance/leasing companies to pass on interest rate rises on new business to return to normal margins.
  2. Value Expectations: Sellers using recent margins, defaults and growth rates to set a forecast will find it very difficult to come to an agreement on value with a buyer who has a market outlook that is vastly different to recent history.
  3. Buyers are Distracted: You would expect a significant portion of the M&A activity to be driven by banks/bank-owned companies and private equity. Many banks are focused internally on compliance/regulation, e.g. Consumer Duty, capital, e.g. Basel 3.1 reforms, and/or other much larger business units, e.g. mortgages.

    Some of the PE firms historically more active in this sector are more focused on disposal than acquisition.
  4. Competition: Much of the sector has been on a journey of commoditisation for some time, driven by factors including regulation. Many finance/lease companies are trying (and some believe they are achieving) differentiation; however, based on what I have seen and heard, market share shifts are predominantly based on price.

    Other than more strategic acquisitions where you are achieving significant benefit outside of the performance of the acquired business, this makes it difficult to justify an acquisition although developments in areas such as ESG and AI have the potential to turn this around.

So, what else has been happening?

Given the uncertainty in the UK economy in general, and continued positive trading across the finance/leasing sector generally, many firms have been happy to just sit on their hands. Others have looked at raising additional debt and returning capital to shareholders, or more interestingly, outsourcing the management of their portfolios possibly as a step towards selling them in the future.

These options will not be appropriate for a lot of businesses out there who are considering a sale and there is most certainly a build-up of businesses that have or should have already been for sale.

If market conditions do not materially improve, this is likely to be good news for those with capacity for an acquisition as many of these assets may come to market at a very attractive price. If you are one of those shareholders waiting for a better market to sell, you may want to consider coming to market earlier to avoid the rush.

For more information, contact:

Christian Roelofs, CEO, Finativ

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