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Dealmaking optimism tempered by cautiousness
While it doesn’t garner many headlines, deal activity in banking and capital markets is rebounding. The deal count in the third quarter of 2024 was the highest in nearly two years. Firms are preparing for more transactions should the merger environment continue to improve.
We expect activity to keep rising, helped by the Federal Reserve’s pivot to lowering rates and the Republican sweep in the election. Inflationary pressures are subsiding, and the Federal Reserve is leaning toward further rate cuts. Lower borrowing costs should support economic activity and loan demand, bolstering bank profits which can be used for dealmaking.
And President-elect Donald Trump’s pro-business stance is stirring expectations of compliance cost relief while also raising hope that new agency leaders will aim to make the merger review process more efficient and transparent.
Our conversations with executives reveal a mix of optimism — about the future and a desire to transform their business — tempered by caution about what happens next. To help direct their deal planning, we consider how the convergence of several trends influences their transaction pipeline, including:
Note: The primary M&A data source used in the 2025 outlook is S&P Capital IQ.
- The pace of dealmaking currently is not enough to relieve competitive and/or cost pressures in banking; and the potentially most important issue is rising regulatory capital requirements.
- Industry executives are often between a rock and a hard place, forced to choose either resilience, liquidity and efficiency or investing as much as they can in digitizing their operations; ideally, they’d pursue both simultaneously.
- The importance of identifying the most appropriate target to accelerate growth, product strategy or both. Two years or more can elapse between a deal’s announcement and integration. That long period can distract management under the best of circumstances — a poor-fitting target only compounds the challenge.
Strategic thinking
Deals strategy and pipeline generally fall into three categories:
- Achieving size. Big banks whose profits expanded as interest rates increased substantially likely will look for strategic options to strengthen their positions and attain additional scale to increase efficiencies. These banks will aim to consolidate their presence in key markets, grow their geographic reach and use their scale to invest in technology and innovation.
- Adding capabilities. Newer, deeper and richer capabilities to serve clients are essential if banks are going to tap new streams of revenue. Banks are continuously looking for innovative technological assets that broaden their current product and service offering or that give them unique capabilities and a strategic advantage.
- Adjusting portfolio. As risk weights and capital charges change, banks will need to explore which assets are non-core and can be put on the block to free up growth capital and improve return profiles. These assets may include capital-intensive, low-margin or high-risk businesses as well as non-strategic geographies. By divesting assets, banks will be able to focus on their core competencies, streamline their structures, redeploy their capital into more attractive areas and increase capital to meet rising regulatory capital requirements.
What to do next
Pent up dealmaking demand in the sector means there will likely be fierce competition when assets or whole businesses come up for sale. Firms need to be prepared, proactive, strategic and agile to be frontrunners in an auction situation. A detailed playbook for capturing value and growth from a transaction is essential in such an environment.
- While Basel III Endgame capital requirements may be reduced in the next proposal, there is still pressure on banks to increase safety and soundness. When considering potential deals, executives are putting more emphasis on knowing the transaction’s effect on capital, and changes to the combined organization’s capital and liquidity requirements.
- To compete in a fast-moving, high pressure bidding war or in a distressed deal, firms should assemble a quick response team made up of leaders from across the institution. That team should perform dry due diligence runs so they’re prepared to do that work under a compressed timeline.
“We expect the merger and acquisition rebound to continue in 2025 and are actively engaged in conversation with clients about their pipeline and deal strategy.”
The bottom line
We expect deal activity to continue rising, helped by the Federal Reserve’s pivot to lowering rates and the Republican sweep in the election. Clients who wish to participate should be preparing by updating their deal playbook and continually reviewing their potential deal pipeline as conditions shift.
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