U.S. financial sector M&A may pick up, PwC predicts

NEW YORK Thu Apr 8, 2010 10:05am EDT

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NEW YORK (Reuters) - For the U.S. financial services sector 2010 holds the promise of more deals, but translating talks into action remains tough amid economic and regulatory headwinds, a PricewaterhouseCoopers report predicts.

A sluggish economy and proposed regulatory, healthcare and tax reforms continue to hang over the mergers and acquisitions market in the sector, making a pickup in activity uncertain, according to PwC's 2010 Financial Services M&A Outlook.

Still, the report predicts the year will be better than what was a dismal 2009, when disclosed financial services transactions added up to $39 billion, a multiyear low and down from $161.6 billion in 2008.

As sector fundamentals improve and reduce the gap between buyer-seller price expectations and uncertainty around various regulatory issues clears, deals should pick up, according to the report, "On the Road Again -- Transactions in an Opportunistic Market."

Already this year the sector has seen some big deals, like the $51 billion sale of foreign life insurance units by American International Group Inc (AIG.N) and the $2.31 billion sale of PNC Financial Services Group's (PNC.N) investment servicing unit to Bank of New York Mellon (BK.N).

"We are definitely seeing more interest and more activity, which should lead to more deals," said Gary Tillett, financial services leader in PwC's transaction services business.

"We are seeing people more willing to investigate, spend time and resources, and pull the trigger to go forward to try to get a deal done," he said. "We had less of that this time last year."

Although there are more reasons to get a deal done now, it does not necessarily mean they will actually happen, he added.

"There are factors out there that would cause uncertainties and force people to think twice about whether it's time to move," he said.

Failed bank sales, consolidation among the smaller, independent asset management firms and an uptick of deals among property and casualty insurers will drive dealmaking through the rest of the year, the report said.

Although banking would likely continue to be dominated by Federal Deposit Insurance Corp-sponsored deals, the report says other sectors will start to show normalcy, making for a more balanced split between distressed and non-distressed deals across the financial services industry.

Independent asset managers are facing challenges as institutional investors negotiate lower fees and assets under management decline, driven by redemptions and depressed values despite some recovery last year, the report said. They also face increased operational and regulatory scrutiny.

Consolidation would help them increase scale, cut costs and spread expenses over a larger pool of assets, it said.

In the insurance sector, struggling life insurers looking to raise capital through the sale of non-core businesses and continued soft product pricing in the property and casualty area are prompting consolidation, it said.

But overall deal activity in the insurance sector is likely to remain muted, it said.

"While behind-the-scenes discussions are expected to continue, announced U.S. domestic deal activity will likely remain fairly dormant," the report predicts, in reference to the insurance sector.

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