Market Uncertainty May Hinder Financial Sector M&A Activity
The financial industry’s current troubles may hinder M&A activity in 2008, according to a new report by Corporate Board Member.
“Current valuations in the market,” according to the report based on a panel discussion of legal, advisory and financial experts , “are not conducive for sellers looking for attractive pricing for the intrinsic value of their franchises, and buyers may be unwilling to pay large premiums, given further uncertainty.”
Acquisitions of parts of companies are more likely than full scale takeovers this year: “Some organizations will need to raise capital, and so rather than sell the entire institution, they will sell off pieces that are not core but may, for the right buyer, command a premium price, or at least free up capital.”
Financial services companies will most likely be returning to their core operations.
“Companies [are] evaluating noncore operations, not only in terms of risk management, but also in terms of cost of capital and expense control. These considerations could generate consolidation-type transactions in certain sectors.”
Another potential source of significant M&A activity that is particularly ripe this year is “where there is a prior vested interest” in the target company. Similarly, “potential rescue activity in the bond insurer area” was considered as a possibility.
In general, foreign firms currently view US financial firms as potentially attractive investments. Interestingly, “many of the Japanese banks have indicated they’re willing to help out Wall Street firms. Much of the interest will depend on how long favorable exchange rates persist, coupled with their minimal preexisting U.S. exposure. That should prove to be a significant advantage over a lot of domestic investors going forward.”
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