Where next for the merger market?

Several UK and European insurance businesses could be sold as part of the sector restructuring as banks try to find ways of raising capital says Pricewaterhouse Coopers. “Throughout 2009, there will be scope for in-market and cross border consolidation, and banks divesting insurance subsidiaries will provide further stimulus for M&A in the European insurance market,” said Charles Garnsworthy, partner at PwC. “UK banks will probably be active in making divestments in 2009 as they seek to shore up their capital positions.”

Market consolidation could also be driven by falling profitability in the general insurance market, capital pressure on life companies, and capital requirements under Solvency II. But there will be winners out of this, points out Garnsworthy: “There may be opportunities for aggregators and external capital sources, such as PE Houses, to selectively acquire distressed portfolios at discounted prices.”

The report by PwC revealed that deal dynamics have changed dramatically since 2008. Deals are now dominated by haste, opportunism, and government involvement, and are no longer driven by the desire to expand businesses or reaching into new markets.

Government involvement has and will continue to be a major force behind driving domestic deal making added PwC. Domestic deals accounted for €137bn of total deal activity in 2008, up 81% from €76bn in 2007. In 2008, cross border deals accounted for €41bn, down 69% from €132bn in 2007.

“Safety and stability will be the watch words for 2009,” said Nick Page, partner of PwC. “Government influence will encourage boards to aim for stability and capital generation instead of top line growth. Having to justify sales or acquisitions to taxpayers and ministers will be a new challenge for many organisations.”