Creating value

beyond the deal:

financial services
Maximise success by keeping an
intense focus on three key elements
#BeyondTheDeal
Contents
Executive summary 1

Buying spree 2

Creating value 8

Divestments13

Reap the benefits 18

Methodology19

PwC network contacts 20

About this report:

To help understand the factors influencing performance, we interviewed
100 financial services (FS) senior executives from a range of geographies
about their experiences in creating value through mergers and acquisitions
(M&A). All participants in this survey had made at least one significant
acquisition and one significant divestment in the past 36 months.
The survey included a combination of qualitative and quantitative questions
and all interviews were conducted by telephone. All responses, where not
attributed to our clients, are anonymised and presented in aggregate.

This report draws on the insights gleaned from the study and the interviews,
and on our own experience helping clients navigate the deals landscape.
It offers a roadmap for how leaders should approach value creation within
their organisations to deliver the full return potential on the transaction.
Executive summary
Dealmaking in the FS industry has seen significant growth in the years since the global
economic crisis because of — and in some cases despite — dramatic shifts in
regulation, technology and monetary policy. This climate required businesses to look
beyond organic investment to protect and grow revenues, leading many to M&A.

More recently, global events — such as Brexit and tariff disputes between the US and
China — have presented significant external challenges, though more so in some
regions than others. These events are dampening the growth aspirations and
profitability of banks and insurers around the world. As a result, leaders in this industry
are looking to strategic mergers, acquisitions and divestments to offset headwinds. Nick Page
Global Financial Services
M&A has become a key lever for any FS firm to prosper. To help FS firms unlock more Deals Leader, PwC
long-term value from M&A — whether acquiring or divesting — PwC surveyed 100 nicholas.r.page@pwc.com
senior FS executives around the world and asked about their experiences with value
creation in M&A. All participants had made at least one significant acquisition or
divestment over the past 36 months —no less than €50m (US$55m) or 10% of the
buyer’s or seller’s market capitalisation. We conducted additional analyses on FS
companies’ performance after acquisitions and divestments, using total
shareholder return.

This report follows a larger PwC report, Creating value beyond the deal, which
examined shareholder returns for thousands of transactions, eliciting responses from
600 global corporate executives in six large-industry sectors. The core finding:
Prioritising value creation up front results in outperformance of industry benchmarks
by 14 percentage points. Malcolm Lloyd
Global, EMEA and Spain
That report found that for all industries, including FS, companies can get more value Deals Leader, PwC
out of M&As by focusing on three elements: malcolm.lloyd@pwc.com

1 Stay true to the strategic intent: The organisation needs to approach deals
as part of a clear strategic vision and long-term objectives for the business.
Opportunistic dealmaking can create value, but not as often as strategic deals do.

2 Be clear on all the elements of a comprehensive value creation plan: Ensure

a thorough and effective process for conducting the deal with the necessary
diligence and rigor around financials, advanced analytics, operations, technology,
tax, legal and people matters.

3 Put culture at the heart of the deal: Keeping people and cultural aspects up
front in planning is fundamental. Wide engagement and communication of your
value creation plan will help retain and build buy-in from key personnel. Failing to
plan for cultural change will undermine the value created.

The FS survey and analysis found that while most acquisitions were successful for
most FS respondents, they could have been executed better to create even more
value. This can be achieved through better target selection, pre-deal M&A blueprints,
talent retention and cultural integration planning, and Day One readiness. The earlier
these factors are considered in the M&A process, the better the outcomes.

Creating value beyond the deal: financial services 1

Buying spree
FS firms have been competing fiercely for suitable
targets to expand markets, increase geographical
footprints and address industry disruptions
(see Exhibit 1). While the deal dynamics are often local
in nature and sub-sector specific, the overall goal is
to find new customers, increase product portfolios
and generate top-line growth.
There’s also been significant investment in fintech
companies to offer better products and services that
customers are coming to expect, while also expanding
FS firms’ technological capabilities. Private equity (PE)
firms are also a significant driver of M&A activity in
the FS industry (see Creating value beyond the deal:
private equity).

Exhibit 1
Expansion, refocusing and response to external challenges drive FS deals

FS firms see acquisitions as a way to cope with disruption and pursue market expansion…

Q: What was the main strategic driver of the acquisition? % of FS deals

35% 32%

16% 4%
10% 3%
Disruption within Market Technology Cost efficiencies Talent Product
industry expansion acquisition and synergies acquisition diversification

…and have been divesting businesses to cope with external challenges and raise funds

Q: What was the main strategic driver of the divestment? % of FS deals

31%
23%
19%
14% 11% 2%
Reducing Raise funds for Non-core Unit struggling Worth more to Anticipated
exposure for other purposes business against someone else technological
macroeconomic competition than to us disruption
or geopolitical
reasons
Source: Creating value beyond the deal: financial services
Base: 2018 survey of 100 FS executives on their most significant acquisitions and divestments, conducted in the preceding 36 months.

2 Creating value beyond the deal: financial services

Banking
Banking deals have been driven largely by cost
synergies, economies of scale and, to some extent,
growth. In the US, for example, we are expecting many
more M&A deals to be centred on community and
regional banks. M&A could help these smaller banks
compete for deposits, reduce their cost base and invest
in technology to transform into the types of consumer-
centric businesses customers have come to expect.
Rising interest rates in the past year and a half have
further sparked a race to capture deposits through M&A.
Banks are also seeking innovators in payments to
customise services and boost profits, including fintech
firms, which themselves have undergone consolidation
to increase scale and product mix. During the second
quarter, Global Payments, which helps banks manage
credit- and debit-card portfolios, bought Total Systems
Services, which helps businesses handle credit- and
debit-card payments, for US$21.5bn. The combined
company will provide payment technology and software
to more than 3.5m small-to-midsize merchants and
more than 1,300 financial institutions worldwide. This
convergence of FS and technology is reshaping both FS
and related businesses.
Of course, larger banks can offer more incentives to
targets than their smaller peers, but non-banking players
are also entering the deposit space. Robinhood, for
example, a wealth management platform in the US,
recently launched a guaranteed-savings (non-FDIC)
product. Credit unions, seeking to increase scale, are
intensifying the competitive environment through their
willingness to pay more than their big-bank competitors.
There are some sharp regional variances. Banks in
Europe, the Middle East and Africa (EMEA) — particularly
those in Europe — have been held back by a fragmented
market. Consolidation and restructuring are needed in
that region to achieve a level of efficiency comparable
to the US. Europe has about 130 large banks servicing a
€5.3tn (about US$5.9tn) economy. That’s one bank per
€118bn (about US$130bn) of GDP in Europe versus more
than US$300bn of GDP per bank in the U.S.
PE has also driven some significant banking deals.
Cerberus’s €1bn (US$1.2bn) acquisition of HSH
Nordbank in 2018 was Germany’s biggest banking
deal. Also in Germany, Deutsche Bank is taking strong
measures to meet its strategic goals, including disposals
and mergers, especially after the failed merger with
Commerzbank.
The Asia-Pacific (APAC) region saw record highs in
deal making, particularly those coming out of China
and Japan, as FS companies sought to streamline
and refocus operations while expanding regionally. An
exception is India, where the ongoing repair of banks’
balance sheets and the rebuilding of capital buffers
is resulting in a plateauing of stressed assets and a
rekindling of credit flows. To facilitate consolidation
among public sector banks, the federal government
recently announced a megamerger that combines 10
state lenders into four entities. Post-merger, India will
have 12 public sector banks, compared with 27 just
two years ago.
32%
Proportion of respondents
who said market expansion drove
their acquisition.
Creating value beyond the deal: financial services 3
Insurance
Globally, insurers are looking at acquisitions to
generate scale, become more cost-efficient and expand
into specialty lines in the face of soft global insurance
pricing and sluggish volume growth. While insurers
have been sitting on plenty of capital, many have been
struggling to grow organically.
Recently, the global insurance market has seen
widespread consolidation of the fragmented
broking markets in the US and UK, as well as a few
transformative property-and-casualty insurance deals,
as large groups seek opportunities to scale and grow
revenues. Two deals in the US accounted for more than
half the year’s total value: AIG’s US$5.5bn acquisition
of Validus, a reinsurer and owner of a Lloyd’s syndicate,
and AXA’s US$15.4bn acquisition of XL Group.
The US insurance industry had a banner year in terms
of deal volume in 2018, with most activity coming from
serial acquirers such as Acrisure, AssuredPartners,
Arthur J. Gallagher & Co., Alera Group and NFP
Corp. Consolidation of distribution and insurance
intermediaries has fuelled much of the dealmaking,
pushing up transaction volume. Also, American Family
Insurance, Principal Financial Group and Liberty Mutual
recently gained opportunities to expand underwriting
capabilities, generate additional scale, enter new regions
and double down on existing lines of business through
their M&A activity.
4 Creating value beyond the deal: financial services
APAC insurers are also seeking to scale markets,
products and capabilities, but they are largely investing
in foreign markets. Stagnation in Japan, where insurers
are struggling to grow organically amid an ageing
population, has been driving expansion into other
countries. APAC insurers also are striving to build a
more robust framework for governance in their overseas
subsidiaries, balancing the need to satisfy regulators
with efforts to drive sustainable growth. Targets are
largely in the US and other Asian markets.
Japanese insurers have spent more than US$50bn in
acquisitions over the past five years, making the sector
the second-largest buyer of insurance assets globally,
next to the US. Two of the largest recent deals involving
Japanese acquirers were Nippon Life’s US$980m
acquisition of MassMutual Life Insurance and MS&AD
Insurance Group’s US$820m purchase of ReAssure
Jersey One.
According to bankers working with Japanese insurers,
their next target area is China. China’s growing middle
class and limited market penetration for life insurance,
combined with the easing of ownership restrictions,
are making Chinese insurers attractive targets.
More than
US$50bn
The amount Japanese insurers
have spent on acquisitions in the
past five years.
With written gross premiums of US$95bn in FY18, the
Indian insurance industry became the 15th-largest
in the world in terms of premium volume. The region
may soon see an influx of foreign capital because the
government has removed the foreign investment limit on
insurance intermediaries from a previous 49%. The move
should help the Indian insurance sector achieve better
penetration rates, which are currently under 4%, below
the global average of over 6%.
PE is driving some insurance deals in Europe. A recent
example is Cinven’s deal to combine Viridium and
Generali Leben with more than 4m contracts. It marks
the biggest insurance deal in Germany.
Large firms such Allianz and AXA are looking into
expanding into African markets. Others, such as Zurich
Insurance Group, have largely given up operations in
places like South Africa and Morocco.

EMEA’s insurance sector, meanwhile, has been

largely saturated with firms and products. Many are
looking to differentiate themselves, using M&A to
expand their portfolios, give their customers access to
new products and improve underwriting and claims-
processing capabilities.

Creating value beyond the deal: financial services 5

Fintech
Fintech deals have been on the rise throughout the
insurance and banking sectors, with significant
acquisitions by large, traditional FS firms, as well
as through corporate venture funds. Traditional FS
companies are seeking deals with these firms to build
out tech- and consumer-savvy capabilities.
Indeed, a recent PwC survey of CEOs at 140 global
insurance companies indicated that optimism is
overtaking initial wariness about digital transformation
and the disruption from start-up firms. Top executives
increasingly view fintech, or ‘insurtech,’ as a contributor
to the value chain rather than a threat.

In fact, 2018 was a banner year for fintech M&A deals,
notably Vantiv’s US$10.4bn acquisition of Worldpay and
PayPal’s acquisition of iZettle for US$2.2bn. Deal activity
is expected to grow as FS companies make digital a core
part of their strategy. PE firms are also grabbing a piece
of the payments market, with Hellman & Friedman's
acquisition of the payments business of Danish company
Nets for US$5.3bn.
Growing regulatory pressures, such as the coming
changes in US GAAP for long-duration contracts, are
expected to increase financial statement volatility and
require meaningful investments in software, systems
and related processes. This will further fuel deals for
fintech firms.

The payments market is expanding rapidly, and there are companies

springing up everywhere with new payment systems. These companies
offer great opportunity for expansion and fostering growth in our business.
Director of M&A at a U.S. FS firm

6 Creating value beyond the deal: financial services

A seller’s market
Despite the volume of deals across FS global markets This intense competition means overpaying is a risk. The
and sub-sectors, valuation was not always a given higher the price, the harder it is to create value. For the
(see Exhibit 2). The sector is awash in capital ready to acquirers, these higher prices mean acquisitions need
be deployed, with buyers in all corners of the industry — to be accompanied by a more robust plan for maximum
including PE and sovereign wealth funds — increasing value creation. Significant room for improvement remains
prices for quality targets. Companies that performed well in the way these acquisitions are managed.
organically and have cash on their balance sheets, along
with money invested in PE firms by pension funds and
sovereign wealth funds, have created a seller’s market.
Indeed, PE firms have raised an astonishing amount of
money recently — US$240bn in the first quarter of 2019.

Exhibit 2
FS acquisitions performed marginally below the all-sector average, with some regional differences

55% of FS acquisitions created value vs. 61% of all …with European acquisitions underperforming
acquisitions across sectors… compared to other regions

% of acquisitions that created/lost value compared Average outperformance in total shareholder returns
to all acquisitions for FS parent company 24 months after acquisition

100% 20%

80%
15%

60% 15
21 10%
40%
17 11
5%
20 40
38
0% 0%
-17 -17
-20% -7 -9
All acquisitions FS acquisitions
-40%
-14
-60% Significant Moderate
value created value lost
APAC Americas Europe
-80%
Moderate Significant
value created value lost
-100%

Source: Creating value beyond the deal: financial services

Base: 2018 survey of 100 FS executives on their most significant acquisitions and divestments, conducted in the preceding 36 months.

Creating value beyond the deal: financial services 7

Creating value
Overall, value creation planning should help the acquired
business realise its full potential and take it to the next
level. With hindsight, FS companies report that value
creation trumps everything else. FS companies can get
more value out of M&As by focusing on the
following elements:
Stay true to the
strategic intent
Take your time
With the flurry of activity in FS M&A, it can be easy to
jump into a deal head-first, wanting to secure a target
before a rival does. But to realise the full value of a
deal — an imperative for any FS company seeking
growth — leaders must take the time to find an
appropriate target and carefully examine their projections
for what the entity will look like on the other side of the
deal. Companies must invest time and resources into
locating the best assets to buy. Leaders must then take
a step back and honestly answer the following: Does the
company really have what I need? Is this deal the best
way to get it? Is this an appropriate cultural match? How
much should we pay?
8 Creating value beyond the deal: financial services
Acquisitions are a means to an end. They are a way to
achieve something more quickly than a company could
do on its own — expansion, competence, capability,
management or anything else it needs. But it’s essential
to have absolute focus on the strategic thinking that
underpins any acquisition because it’s all too easy
to acquire something, only to have it lose value when
the planning is done too late or without the necessary
attention to detail.
Plan for Day One
Although 94% of buyers in the survey had a value
creation plan in place when they signed a deal, 83%
of those buyers said their overall plan could have been
more comprehensive, covering aspects of the deal such
as the strategic repositioning of the combined business,
optimising the operating model and balance sheet, and
considering the right tax structure (see Exhibit 3).
All companies have different
cultures, and it’s just not possible
for every company to fit perfectly in
a puzzle. Finding a target that can
be easily integrated is the most
challenging element in the early
stages of every transaction.
Group Director of Finance at a UK FS firm
Exhibit 3
Clear correlation emerges between investment in integration and ability to create value

Companies spent 5% or less on integration for close 88% of companies that destroyed value with their
to half of acquisitions made acquisition had spent 5% or less on integration

% of FS deals by percentage spent on integration % of FS deals by value created/lost and percentage

spent on integration

100% 100%
12
80% 80%
More than 5% spent
53 on integration
More than 5% spent
60% 60% 83 on integration

40% 40% 88

5% or less spent
20% 47 on integration 20%
5% or less spent
17 on integration
0% 0%
FS acquisitions Moderate to Moderate to
significant significant value
value lost created

Source: Creating value beyond the deal: financial services

Base: 2018 survey of 100 FS executives on their most significant acquisitions and divestments, conducted in the preceding 36 months.

Creating value beyond the deal: financial services 9

A large majority of buyers (88%) said their planning for
Day One readiness could have been improved, and only
58% of companies said they had a synergy plan in place
at signing (see Exhibit 4). Of the companies that didn’t
have a synergy plan in place, 81% destroyed moderate to
significant value, according to our research.
Only 52% of companies had an integration plan in place
at signing, with half saying that they should have planned
for integration much earlier in the process. Of those
that failed to plan for post-acquisition integration, 85%
destroyed moderate to significant value, according to
our research.

Exhibit 4
Dealmakers say value creation should have been more of a priority on Day One

What were your priorities/should have been your priorities on Day One? Select top two, % of FS deals

59% 59%

48% 49%

38%
36%

25%
18% 16%
14% 12% 14%
11%

1%

Value Operational Client/customer Human capital Talent Changing Rebranding

creation stability retention optimisation retention operating model

Should have been priorities Actual priorities

Source: Creating value beyond the deal: financial services

Base: 2018 survey of 100 FS executives on their most significant acquisitions and divestments, conducted in the preceding 36 months.

10 Creating value beyond the deal: financial services

Be clear on all the elements of a comprehensive
value creation plan
Make the most of tax and legal
A smart buyer plans for tax and legal issues. Acquirers
need to have the right tax strategy in place, and a deal is a
prime opportunity to revisit tax structures in a holistic way
both for the acquirer and the combined company. Although
the deal process tends to be commercial, not tax driven,
buyers can create more value through the careful re-
examination of the way the tax structure operates as a new
entity and create new cost-saving platforms and policies.
Legal issues can also hinder value creation, so it behoves
buyers to consider a target’s corporate structure through
a legal lens. There may be a chain of holding companies
or operations split across different jurisdictions, for
example. Once a deal has been made, the acquirer may
want to transfer operations in or out of those subsidiaries
or shut some down. But there may be dividend blocks
within the corporate structure that prevent capital from
being extracted or moved around the group. Either way,
companies can create more value by being aware of the
possible legal implications of integrating two entities.
Integrate technology
Just as a company must integrate two cultures, buyers
need to consider the potentially costly integration of
technologies as merged entities make the transition to
a single system. It can also be challenging to acquire a
fintech business with a sophisticated technical work culture
and merge it into a group that is building its systems from
scratch.
Understand cost and revenue synergies
Consolidation is the low-hanging fruit of M&A deals, with
65% of respondents saying their latest acquisition had
already facilitated cost synergies, and 55% reporting that
their most recent deal had enabled revenue synergies.
Unless there are especially tight labour laws or other
regulatory constraints in the target acquisition’s market,
cost synergies are generally a quicker win for dealmakers
than revenue synergies.
Still, the pre-deal assessment of potential upsides and
synergies needs to be more thorough and detailed,
according to 63% of survey respondents. A full 80% of
buyers stated that more work could have been done to
validate their pre-deal hypothesis.
Faced with competition to acquire assets, creating a more
focused synergy plan is crucial — even in the US insurance
market, where broker consolidators have a well-oiled
process in place to manage acquisitions.
Retain top employees
Another tack to create value is to identify crucial employees
before an acquisition occurs and ensure they are given
incentives to stay with the company. Top talent retention
is one of the most effective barometers of deal success;
81% of companies that destroyed moderate to significant
deal value lost over 10% of the target’s employees after
the transaction, versus 26% of the companies that created
moderate to significant value.
As the best managers and employees exit, the whole
rationale for the deal begins to erode. It’s why the FS firms
that have been most successful in M&A value creation
have taken the time to identify the institutional knowledge,
technical skills and relationships of employees at the
executive level and beyond. In addition to the cost of hiring,
onboarding and training new employees, companies risk
losing intellectual capital, client relationships and the trust,
motivation and morale of the entire workforce.
Tellingly, 95% of surveyed companies that lost moderate
to significant value reported losing key employees during
the transition — employees they had hoped to retain.
Conversely, 85% of companies that created moderate to
significant value reported that they managed to keep their
key employees during that period.
One area to be addressed is the distrust and
misinformation that often circulates among the
management team and other employees during the post-
merger transformation. Clear communication and effective
messaging can alleviate some of the confusion and
uncertainty. Retaining and expanding the best talent is also
driven by incentives, such as competitive pay packages,
and supported by clearly communicated responsibilities for
heads of functions, giving them direct access to the highest
levels of management.
Now, more than ever, the technical skills, data analytics
proficiency and design thinking that FS firms need call
for highly skilled people. Identifying and retaining these
people is crucial to creating value. But the sentiment goes
both ways: Another tack to retain top talent is to invest in
them through upskilling. Find those key employees and
let them know they are valued and have a future with your
organisation by devoting resources to their upskilling.
Creating value beyond the deal: financial services 11
Put culture at the heart of the deal
Mesh beliefs
Poor planning for combining cultures is where most
deals fail to realise their expected value. Most buyers in
global FS firms tend to struggle with cultural integration
because they are being reactive. Instead of scrambling to
address any post-merger fallout, they should be
proactive, taking stock of and planning for possible
culture clashes well ahead of the transaction. Buyers
need to fully understand the DNA of the companies they
are buying, then bring in a mix of management from
inside and outside the acquired company to expand the
culture into one that is inclusive.
Indeed, our research highlights a clear correlation
between the investment that companies make in
integration and their ability to create value: 88% of the
companies that destroyed moderate to significant deal
value spent 5% or less of total deal value on integration.
12 Creating value beyond the deal: financial services
As for cross-border deals, it’s essential to understand
the local cultural and economic environment before
a deal takes place. Beyond the cultural differences
based on geography, there are also vastly different
corporate mindsets to take into consideration. In the
case of fintech, for example, buyers need to understand
the challenges of blending cultures of innovation with
cultures of risk aversion.
Of the buyers we surveyed, 62% said cultural issues
hampered value realisation in their latest deal. More
than 80% agreed they needed a better understanding of
culture before the deal, as well as better communication
and culture management during and after the merger.
Putting culture at the heart of the deal and investing
in integration will ultimately help buyers create a
harmonious culture.
If companies continue to ignore this important step
early in the process, culture shock and an inability to
mesh cultures will continue to lead to loss of value as
well as top talent.
Divestments
On the other side of the deal, divestments are also
critical components of value creation and protection.
Sellers need to be more strategic than they have been
about their disposals and develop a sound divestment
playbook (see Exhibit 5). In principle, any portfolio
reorganisation should add value, whether that involves
releasing an underperforming business unit or shedding
a non-core asset, but in practice that isn’t always the
case. Ensuring that a divestment creates value requires
consistent messaging, projecting the upside of a deal with
potential buyers in mind.
Banks in EMEA have been divesting defensively to
minimise geopolitical and economic risks as well as
exposure to challenging markets and poor investments.
Sellers in APAC have been seeking to build more agile
operating models. In the US, meanwhile, divestiture has
been a means of funding more strategic investments
such as technology.
The US insurance market has seen strong M&A in the past
couple of years, driven by consolidation and repositioning.
One notable example is AXA’s divestment of a minority
stake in AXA Equitable through an IPO raising US$4bn to
help finance its XL Group acquisition.

Exhibit 5
FS divestments performed marginally below the all-sector average, with some regional differences

FS divestments perform marginally below average… ...with European divestments underperforming

compared with other regions

% of divestments that created/lost value compared Average outperformance in total shareholder returns
to all divestments for FS parent company 24 months after divestment

100% 20%

80% 20
13 15%

60%
30 10%
40%
12
15
25 5%
20%
29
10
0% 0%

-20 -29
-8
-40
All divestments FS divestments
-13
-60
Significant Moderate
value created value lost APAC Americas Europe
-80
Moderate Significant
value created value lost
-100
Source: Creating value beyond the deal: financial services
Base: 2018 survey of 100 FS executives on their most significant acquisitions and divestments, conducted in the preceding 36 months.

Creating value beyond the deal: financial services 13

Other divestitures in the insurance industry have
been more focused on reducing coal and other
fossil-fuel underwriting as companies come under
pressure from environmental legislation, particularly in
the US and Europe.
And fintech, which traditional FS companies now see as
more of an enabler than a threat, is strategically divesting
to stay competitive in an increasingly crowded field. As
the fintech industry continues to grow, some insurtech
businesses are beginning to attract attention from the
world’s largest insurance companies. In 2019, Prudential
Financial acquired health-and-wellness solutions
platform Assurance IQ for US$2.35bn, and German
reinsurance giant Munich Re announced a US$250m
investment into online small-business online insurer Next
Insurance, valuing the company at more than US$1bn.
The main strategic motivations for divesting were to
cope with external challenges, raise funds or dispose of
non-core assets.
Exhibit 6
FS firms acknowledge the need to better manage the divestment process and rethink
management engagement strategy
What lessons would you take from this deal for future divestments? % of FS deals
More effective programme management
Communicate better with stakeholders
Improved divestment resources
Start planning divestment earlier
Better understanding of the value trade-off
Divest faster
Source: Creating value beyond the deal: financial services
Base: 2018 survey of 100 FS executives on their most significant acquisitions and divestments, conducted in the preceding 36 months.
14 Creating value beyond the deal: financial services
But by far the main driver for 31% of respondents in their
most recent divestment was to minimise macroeconomic
or geopolitical risks. In Europe, for example, banks have
continued divesting to reduce exposure in challenging
markets and/or to exit sub-scale investments.
As the pace of transformation in FS continues to
accelerate, the minimisation of geopolitical risk
looks likely to become a recurring theme around
the globe — more so given the stretched balance
sheets of institutions now coping with much tougher
capital requirements and, in some jurisdictions,
higher non-performing loans. Large financial institutions
have also disposed of non-core assets in a drive
towards simplifying their business models and reducing
their costs.
Whatever the valuation creation goal of divestment,
little more than a third of FS executives responding to
the survey believe their latest divestment generated
moderate to significant value — a sentiment supported
by the total shareholder return analysis. This suggests
that the industry’s record on generating value from
disposals remains patchy, with regional differences
playing a significant role. Indeed, these firms recognis
the need to better manage this process (see Exhibit 6).
45%
41%
36%
34%
33%
11%
We do possess a formalised exit
plan that has been developed
internally. With negotiations being of
higher importance, we prefer using
the plan in every exit to gain
solidarity and comfort in exiting
from a company.
Director of M&A at a German FS firm

Creating value beyond the deal: financial services 15

Banks
Like other financial institutions, banks are reassessing
their core capabilities and capital allocation strategies
as they weigh potential divestitures of non-core
businesses. These transactions can free up capital to
reinvest in growth and optimise operations. Ultimately,
they can help improve return on equity (ROE) and meet
shareholder expectations.
In the US, divestitures of non-core businesses
announced by Ameriprise Financial, Wells Fargo and
AmTrust Financial Services follow this playbook, raising
funds for technology investments such as artificial
intelligence (AI) and to cope with cost pressures and
eroding fees in the face of competition with fintech.
In EMEA, we have seen banks disposing of their non-
performing loan (NPL) servicing to private equity. The
rationale for these types of divestures is that financial
investors can be more efficient at managing NPLs than
banks. In APAC, specifically China, more sellers may be
ready to be acquired by foreign buyers in the wake of
Beijing’s relaxation of foreign ownership regulations.
Other examples of significant divestments in recent
years have been the result of financial-crisis-related
restructuring agreements with the EU. ING Group sold
several businesses around the world, including insurance
and investment management businesses. Lloyds
Banking Group divested TSB Bank. Citibank divested
its consumer banking operations in Spain, Greece,
Sweden, Japan and other countries to get leaner after
the financial crisis.
Overall, we expect that a focus on legacy business
optimisation will continue to drive divestitures during
coming quarters, accompanied by smaller, more
technology-focused investments and occasional
larger purchases to expand capability or facilitate
market access.
16 Creating value beyond the deal: financial services
Insurance
Investors, including firms backed by PE activity, offer
opportunities for insurers to exit legacy holdings that
are capital-intensive or outside their primary lines of
business. This trend will continue as publicly traded
insurers with legacy blocks of business face rising
pressure to divest. This has been the case in the life and
annuity market in the US, with buyers optimising the
capital structure through reinsurance and tax planning,
improving investment returns from underlying assets and
reduced costs.
Still, the industry’s record on generating value from
disposals is uneven, with the characteristics of the
different regions an important factor.
In APAC, for example, outperformance of industry
benchmarks was 26.8% over 12 months and 20% over
24 months. Divestments in EMEA markets, meanwhile,
have not tended to create value for the parent company
in recent years; underperformance was 11.2% over 12
months and 13.3% over 24 months.
Most sellers have failed to take a considered,
step-by-step approach to shedding their assets, with
76% of companies that lost moderate to significant value
stating they did not have a “formalised methodology/
blueprint creating value through divestments that applies
across deals.” The remaining 24% abided only “partially”
or “not at all” to the plan.
A seller’s plan
Lack of preparation has been a major issue in most
divestments, with companies large and small typically
trying to execute the deal too quickly. Companies tend
to underestimate the complexity and time required to
prepare for a divestiture. FS firms need a solid plan in
place for the separation of the business that goes beyond
financial statements.
FS firms will need to manage divestment more effectively
through the development of and adherence to a
‘divestment playbook,’ even when dealing with one-off
transactions or the sudden introduction of a deal. This
seller’s guide to valuation must include the following:
Develop a divestment playbook
Sellers need to develop consistent, value-focused
messages based on thorough preparation and portfolio
review with potential buyers in mind. This demands a solid
methodology and a plan for handling the most awkward
questions a potential buyer could ask.
Don’t leave due diligence to the buyers
Despite its potential to create value, many divesters we
surveyed say they carry out no vendor due diligence at
all. Successful divesters head off difficulties at an early
stage, with vendor due diligence efforts that reflect a more
disciplined approach overall to divestments.
Explore the art of the possible
Divestment plans should involve more than just the
allocation of existing capital. They should consider and
map out the art of the possible. What could the asset
being sold achieve with unconstrained capital, bringing
in much-needed new skills and bolt-on acquisitions?
This kind of approach will not only attract a wider pool
of potential buyers, it will also hold on to value through
the deal.
Leverage the experience of others
Divestors — especially those with minimal experience in
this area — should take advantage of third-party advisors.
The goal should be to use these advisors as early as
possible in the process, to help investors understand the
opportunity and build their confidence over time.
Make the most of your people
Again, the success or failure of any M&A deal, be it on
the buy or the sell side, hinges on keeping key members
of the team. These employees, especially in the divested
companies, typically start to worry about their career
safety long before a deal closes. Their exit decreases the
success of the deal and may even jeopardise a potential
sale. The importance of engaging them early in the
process and providing an incentive linked to the deal’s
success were two key findings of the survey.
Give the acquirer quality time with the key players to build
confidence. Beyond consistent and upbeat messaging,
sellers must be prepared to answer the awkward
questions and be fluent in the facts. Obviously, failure to
prepare limits the number of interested buyers, who must
have all the information they need to analyse the business.
If there are major holes in the data, some bidders may
walk away, while others may discount values that are not
sufficiently backed up or explained.
Address legal complexity
On the divestment side, much of the legal complexity
stems from separating out the entity being sold and
making sure that separation is done early enough so the
entity is ready to go when it comes to market. Further,
a master service agreement (MSA) is a key legal lever
for generating value from the divestment, because it
helps align the interests of the two parties, specifying
performance objectives and outlining responsibilities,
such as the transitional services the seller will provide to
the buyer. Rather than negotiating a high price up front,
buyers and sellers should consider how they can share
value created over the longer term.
Creating value beyond the deal: financial services 17
Reap the benefits
Deal value for FS companies rose to more than
US$100bn in the first quarter of 2019 alone. But most
of these companies aren’t reaping as much benefit
from these transactions as they should. Whether a
company is a buyer looking to maximise revenue growth,
cost-saving potential, increased capacity and a larger
market footprint, or a seller seeking to shed non-core
assets to raise funds to reinvest in digitisation, value
creation is the only way forward in today’s challenging
business landscape.
In a highly competitive environment where regulation,
technology and monetary policy are in constant flux,
financial firms must move beyond plucking the low-
hanging fruit of short-term cost synergies or rushing to
bid for the first target that looks good on paper. They
must carefully rethink the way deals are done from
inception to well beyond the close of the deal.
18 Creating value beyond the deal: financial services
They need to spend more time on grooming and
understanding the target, its culture, technologies
and external relationships. With talent retention being
such a necessity for success, buyers must keep their
people and culture at the centre of the integration
process through clear and consistent messaging and
incentives. The pre-deal assessment of future upsides
and synergies needs to be more thorough, and time
must be taken to test the hypotheses — no matter how
intense the competition for the best targets. Having
a comprehensive value creation plan with Day One
readiness, laid out early in the process, is an imperative.
Value creation planning should be about helping the
acquired business realise its full potential and taking
it to the next level. Devoting resources to making an
integration successful — with greater attention to detail
throughout the process — is a must for any FS company
that wants to create real dollar-value benefits through
M&A activity.
Methodology
To help understand the factors influencing performance, This report draws on the insights gleaned from the study
we interviewed 100 FS senior executives from a range and the interviews, and on our own experience helping
of geographies about their experiences in creating value clients navigate the deals landscape. It offers a roadmap
through M&A. The report includes transactions between for how leaders should approach value creation within
January 1, 2008, and December 31, 2016. All participants their organisations to deliver the full return potential on
in this survey had made at least one significant acquisition the transaction.
and one significant divestment in the past 36 months.
The survey included a combination of qualitative and
quantitative questions, and all interviews were conducted
by telephone. All responses, where not attributed to our
clients, are made anonymous and presented in aggregate.

Creating value beyond the deal: financial services 19

PwC network contacts
Nick Page UK US
Global Financial Services Joanna Gremouti Neil Dhar
Deals Leader, PwC Director, PwC UK Partner, PwC US
nicholas.r.page@pwc.com joanna.gremouti@pwc.com neil.dhar@pwc.com

Germany Michael Magee John Garvey

Christopher Sur Partner, PwC UK Global FS Leader
Partner, PwC Germany michael.magee@pwc.com Partner, PwC US
christopher.sur@pwc.com john.garvey@pwc.com
Chris Samson
Italy Partner, PwC UK Gregory Peterson
Pierpaolo Masenza chris.samson@pwc.com Partner, PwC US
Partner, PwC Italy gregory.j.peterson@pwc.com
pierpaolo.masenza@it.pwc.com James Tye
Partner, PwC UK
Spain james.tye@pwc.com
Malcolm Lloyd
Global, EMEA and Spain
Deals Leader, PwC
malcolm.lloyd@pwc.com

Switzerland
Christoph Baertz
Partner, PwC Switzerland
christoph.baertz@ch.pwc.com

20 Creating value beyond the deal: financial services

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