A case for optimism, in the face of uncertainty 2013 US financial services M&Ainsights

February 2013 A publication from PwCs Deals practice

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Table of contents

The heart of the matter

Increased desire for financial services M&A tempered by continued uncertainty

An in-depth discussion

Insights and outlook for M&A activity in 2013

Banking Insurance Asset management Other financial services 6 6 7 7

What this means for your business

12

Managing opportunity and risk

February 2013

The heart of the matter

Increased desire for financial services M&A tempered by continued uncertainty

Welcome to our sixth annual US financial services M&A insights. This publication provides perspectives on the industrys key trends, an analysis of the latest transactions, and a look at expected activity in 2013.
2012 was another challenging year for announced deal activity in the financial services sector but one that provides some cause for optimism in 2013. In terms of total announced deal activity, 2012 was nearly a mirror image of 2011 with 768 announced transactions in 2012, just slightly more than the 756 announced deals in 2011. Total disclosed deal value decreased from $72.1 billion in 2011 to $62.4billion in 2012; however, the decrease was largely the result of a single transaction in 2011the $32.7billion acquisition of HSBC Holdings PLCs card and retail services business by Capital One Financial Corporation. Excluding this transaction, total disclosed deal value increased $23.0 billion, with the Asset Management, and Other Financial Services (Exchange, Specialty Lender, Investment Bank, and Brokerdealer) sectors driving the increase. However, the deal market remains significantly below levels seen before the financial crisis when 1,048deals were announced with a disclosed value of $162.7 billion in 2007. In the initial months of 2012, deal activity was dampened as the European sovereign debt crisis, volatile equity markets, the increasing regulatory burden and a pullback in financing contributed to reluctance by investors to aggressively pursue transactions in the US financial services sector. However, 2012 seems to have been a year of change and improvement as the US experienced modest but steady growth in GDP, a decline in the unemployment rate and an improvement in the stock market. These factors, coupled with reduced concerns around the European sovereign debt crisis and an increase in the availability of attractive financing contributed to a surge in deal activity in the last quarter of 2012. The pent-up demand for acquisitions that had been building in recent years, coupled with a push to complete transactions before the anticipated change in capital gains tax rates resulted in 224 announced transactions in Q4 2012, the highest level of quarterly activity since Q4 2010. 2012 also represented a return of private equity (PE) to the financial services industry as PE-backed announced transactions increased 73% from 40 in 2011 to 69 in 2012. Furthermore, PE investments for the year were spread across a broad spectrum of FS targets including banking, insurance, asset management and other financial services. With the prevalence of attractive financing, we expect this trend to continue in 2013. One specific

area of activity for PE in 2012 related to opportunities created by divestitures of non-core assets from certain financial institutions, including Socit Gnrale, Sun Life Financial, Inc. and Aviva PLC. We have seen a renewed focus on acquisitions to drive profitable growth following a period in which many financial services companies have spent considerable time improving internal cost structures in reaction to the recent challenging economic environment following the financial crisis. While there appears to be a significant amount of pre-deal activity across the industry, many deals did not progress to signing and close in 2012. Valuation gaps, due to differences between the buyers and sellers expectations of future profitability, continue to present significant challenges in reaching an agreement on pricing and structuring. Although the desire for M&A remains high among buyers, uncertainty in growth prospects in the near-to-medium term, regulatory approvals, integration of operations and the large number of new regulations coming online whose impacts and costs are uncertain have posed additional challenges to firms seeking to successfully complete transactions. These challenges receded somewhat during 2012 and we expect that trend to continue during 2013. We hope that you find our analysis and perspectives useful. If you would like to discuss any of the trends raised in this report in further detail, we invite you to contact any of the PwC partners listed in the back of this publication.
The heart of the matter 3

An in-depth discussion

Insights and outlook for M&A activity in 2013

Looking ahead:
Several factors, notably increased regulatory cost, depressed organic growth and the greater availability of attractive financing, are expected to create both uncertainty and opportunities in 2013.
The implementation of new regulatory standards such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and Financial Industry Regulatory Authority (FINRA) Rule2111, coupled with the ongoing discussions around Solvency II are putting increased cost pressures on the industry. These cost pressures are expected to drive increasing consolidation across small to medium sized companies as they seek scale in order to mitigate the increased expense burden. In addition, companies are making selective decisions as to where they want to compete and are divesting those businesses which are no longer core to their operations. Increased access to capital and financing, together with strengthened balance sheets and continued divestiture activity fuelled a robust level of deal activity in Q4 2012 and we expect this trend to continue in 2013. In addition to scaling businesses to address the increased regulatory cost, there is improving corporate confidence leading companies to renew their focus on driving profitable growth. However, the prolonged low interest rate environment and resulting low investment yields have continued to strain the profitability of many financial services companies. As a result, we expect many well capitalized financial services companies to turn to strategic acquisitions to expand their geographic footprint or product capabilities in order to achieve their growth objectives. With investors thirst for higher yields, financing for transactions remains attractive for financial sponsors to pursue new dealsand monetize existing investments. While concerns still remain over governmental fiscal policy, regulatory changes and the associated uncertainties over future asset write-downs, these concerns appear to have lessened during 2012. However, we expect European financial institutions to continue to divest of non-core assets in the US, thereby creating opportunities for acquirers during 2013. It is also unlikely that struggling European banks will contribute substantially to inbound deal flow for some time.

An in-depth discussion

We believe the following key trends will drive M&A activity in each financial services subsector in 2013: Banking
Deal activity in 2012 remained somewhat flat compared to 2011, with the number of announced deals increasing 10% but the value of deals decreasing 20%. Yet, this was despite a 50% decline in the number of FDIC assisted transactions. Excluding these, deal volumes were 43% higher than the prior year. We expect 2013 deal activity to be initially muted as uncertainties over the eventual impact of regulatory initiatives (Dodd-Frank Wall Street Reform, Consumer Protection Act, Basel III etc.) continue. Activity at large-cap institutions could eventually be driven by spin-offs of non-core businesses in response to penalties associated with being deemed too big to fail, regulatory limitations on the nature of operating activities at retail banks and, particularly for European institutions, a continued need to raise capital levels. Newly proposed regulation, such as the Intermediate Holding Company requirement for foreign banks, may also drive divestiture activity in the US markets and provide opportunities for buyers. At the small- and mid-cap level, M&A activity will be driven by the need for economies of scale to combat the increasing costs of regulatory compliance and the flat yield curve. In the latter half of 2012, the market saw considerable focus on the mortgage banking sector driven by borrower refinancing activity and from high profit margins resulting from capacity constraints amongst originators. We expect to see this continue for much of 2013 and for continued interest, particularly from PE, in acquiring mortgage servicing rights, which is considered a potentially lucrative short- and long-term investment. Furthermore, the recent announcement by the OCC and the Federal Reserve that it had reached an agreement with ten mortgage companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing, reduces uncertainty in this sector. The number of FDIC assisted transactions declined to less than 20% of 2012 volume, down from almost 40% in 2011. As the pool of deeplytroubled banks continues to shrink, this trend is expected to continue.

Insurance
While insurance deal volume remained flat in 2012 compared to 2011, momentum increased in the final quarter of 2012 and we expect this to continue into 2013 as a result of the following: Continuing low investment yields driven by the Federal Reserves efforts to stimulate economic growth through quantitative easing and other monetary policies will continue to strain the profitability of insurance companies. In order to mitigate this pressure, we expect them to pursue strategic acquisitions and/or exit certain lines of business. Uncertainty around the SolvencyII initiative and its potential impact on the capital requirements for European insurers and reinsurers will probably lead some companies to exit the US market. In 2012, we saw a number of European based insurers divest their US operations and we expect this trend to continue into 2013 as companies seek to further enhance their capital positions. Over the past few years the P&Cindustry has experienced significant catastrophe related losses as a result of various natural disasters around the world. Most

A case for optimism in the face of uncertainty, 2013 US financial services M&Ainsights

recently Superstorm Sandy hit the North East US in October 2012 causing significant catastrophe losses. These catastrophe losses may be severe enough to drive an increase in market pricing thereby increasing the attractiveness of the industry to potential acquirers.

involving such independent managers with the improvement in valuations. We also expect to see continued divestiture activity from European and US banks and insurance companies, as these organizations deal with the impacts of regulatory changes. In 2012 and earlier years, such divestitures have not always resulted in successful signed deals primarily due to the valuation gap between buyers and sellers. One of the key unknowns which will impact future deal volumes is whether those broken deals would come back to the market.

the industry. The largest announced deal in the Other Financial Services sub-sector was Intercontinental Exchanges $8.2billion acquisition of NYSE Euronext and we expect continued exchange consolidation globally in 2013. Specialty finance and loan servicing deal volume increased in 2012 with 62 announced deals compared to the 52 announced deals in 2011, as with a number of sellers exiting the mortgage business due to the heightened regulatory burden and increase in compliance costs. These have provided a steady stream of business and portfolios for sale allowing buyers to expand their product offering, build their servicing platforms and take advantage of economies of scale. Additionally, while a number of banks would have liked to have sold their mortgage businesses operating under the OCCs consent order, the recent boom in mortgage refinancing as a result of the Home Affordable Refinance Program (HARP) may significantly increase their returns and interest in the business.

Asset management
While the reported deal volumes in 2012 is down compared to prior year, there has been a pick up in deal activity in the second half of the year and we expect this momentum to continue into 2013 activity. Deal values in 2012 far exceeded the 2011 levels, even after excluding the mega deals completed in both years, as the number of medium sized disclosed deals increased which also signals a recovery in the sector. Historically, asset management deal volumes have been driven by deal activity involving the sale/merger of small to medium sized independent asset managers as the sector is fragmented. Since the financial crisis, these small to medium sized managers have not been in the market in the same way, resulting in much fewer deals. We dont expect these independent managers to flood back to the market in 2013 in large numbers but we do expect some improvement in the number of deals

Other financial services

There were 56 announced brokerdealer transactions in 2012, up from 47 in 2011. We expect small broker-dealer entities to continue to be vulnerable to consolidation in 2013 as a result of declining margins caused by pressures on revenue and increasing costs. Competitive pricing, low trading volumes, and historically low interest rates are putting pressure on the cash spreads and revenues earned by brokerdealers. At the same time, various regulatory reforms, including DoddFrank, FINRA Rule 2111, and cost basis reporting requirements coupled with increased technology costs are putting increased cost pressures on

An in-depth discussion

Figure A: Announced US financial services deal activity (20082012)

900 800 700 600 500 400 300 200 100 0 $180

$153.2

$160 $140 $120 $100

This also reflected improved financial performance in the industry. In the third-quarter of 2012, compared to the prior year, FDIC insured institutions improved earnings by 6.6%, increased ROA from 1.03% to 1.06%, and reduced net charge-offs by 16.5%. The merger of M&T Bank and Hudson City represented the only deal with a disclosed value of greater than $2.0 billion. Other notable transactions in the banking sector included Union Bank, N.A.s $1.5 billion acquisition of Pacific Capital Bancorp and FirstMerit Corporations $1.3 billion acquisition of Citizens Republic Bancorp, Inc.
$ in billions

Deal volume

840 650 613 $50.9

756 $72.1

768 $62.4

$80 $60 $40

$36.1

$20 $0

2008 Deal volume

2009

2010 Disclosed deal value

2011

2012

Insurance
The insurance sector was the most active in terms of volume as the sector appears to have recovered from the 2008 financial crisis and is putting excess capital to work. Excluding managed care transactions, the sector saw 305 announced deals in 2012 compared with 310 in 2011. Insurance brokers continued to be the most active subsector with 253 deals in 2012, an increase from the 241 in 2011. Insurance accounted for $10.1 billion of disclosed deal value in 2012, a decrease from the $12.9 billion recorded in 2011. Average deal size decreased in 2012 compared to 2011, as there was only one multi-billion dollar deal in 2012 (the $2.3 billion acquisition of USI Holdings Corporation) compared to Alleghany Corporations $3.5 billion acquisition of Transatlantic Holdings, Inc and Tokio Marine Holdings, Incs

Source: Thomson Reuters and SNL

2012 Recap
While overall deal volume remained consistent, individual sectors experienced differing trends.

Banking
The banking sector represented the second largest sector in 2012 by both the number of announced deals and disclosed deal value. Deal volume experienced a 10% increase, with 273 deals announced in 2012 compared with 248 in 2011.

Total disclosed deal value declined from $16.9 billion in 2011 to $13.6 billion in 2012. While the average deal size decreased in 2012 versus 2011, average premiums paid over the value of tangible equity increased to around 17% in 2012, from just 5% in the prior year (the lowest level since 1990) as uncertainties over asset quality and the interest rate environment began to dissipate.

A case for optimism in the face of uncertainty, 2013 US financial services M&Ainsights

$2.8 billion acquisition of Delphi Financial Group, Inc in 2011. 2012 saw a number of transactions involving PE and insurance brokers including New Mountain Capital, LLCs recapitalization of AmWINS Group, Inc. and KKR & Co. L.P.s acquisition of Alliant Insurance Services,Inc. While the deal values for these transactions have not been disclosed, the acquisition price for each of these transactions is estimated to be in excess of $1 billion. (Note, these values are not included in the disclosed deal values in this publication) While insurance announced deal volumes have declined slightly in 2012, we noticed increased interest in the sector on the part of both buyers and sellers. However, this did not translate into an increase in deal volume as parties struggled to reach agreement on key transaction terms, including valuation. One area of contention was buyers sought to acquire specific products or business lines, while sellers were interested in a clean exit.

Figure B: Announced US financial services PE deal activity by segment (20082012)

90 80 70 60 50 40 30 20 10 0 2008 Banks Insurance $12

20

$9.6

$10

Deal volume

13 9 13 $4.1 17 24 13 $0.7
2009 2010 Asset management Others

15

$8

$ in billions

6 11 13 39 $2.5 12 2 10 9 19 $0.3
2011 2012 Total PE deal value

15

$6

16

$4

23

$2

$0

Source: Thomson Reuters and SNL

Asset management
The asset management sector experienced a 27% decrease in the number of announced deals, with 72 in 2012 compared with 99 in 2011. The hedge fund subsector drove a large part of this decrease with 29 deals in 2011 and 15 in 2012. Wealth management was the most active sub-sector with 28 deals in 2012. While asset management deal volume declined, total announced deal value

increased from $3.3 billion in 2011 to $8.6 billion in 2012 which was largely driven by Morgan Stanleys acquisition of the remaining interest in Smith Barney for $4.7 billion. Excluding this mega deal, as well as the Neuberger Berman deal from 2011 deal values ($1.5 billion), this still results in deal values increasing more than double. This increase in deal values is driven by having larger number of medium sized announced deals. PE interest in asset management segment continues to be strong in 2012 as well. Carlyle led the pack in this effort having signed three deals during the year, where two of those deals are within the top 25 deals for

the US (TCW and NGP Energy Capital Management). PE interest in asset management continues to be driven by acquisitions for the manager as well as portfolio company acquisitions. Wealth management deals contributed 39% of the sectors total announced deal volume in 2012 and accounted for the sectors largest deal Morgan Stanleys acquisition of the remaining interest in Smith Barney for $4.7billion. We expect this subsector to continue to perform strongly in 2013 in terms of the number of announced deals but we may not see the large deals like those seen in 2012.

An in-depth discussion

Figure C: 20112012 Announced US financial services deal volume (by quarter)

250

debt being the main driver fuelling PE activity in the US market place. Although overall deal volume was consistent in 2012 versus 2011, there is cause for optimism of positive deal momentum into 2013 following an increase in volume in Q4 2012. Deal volume declined each quarter in 2011 largely because of the European debt crisis and the lack of a consensus resolution on regulatory issues. Despite an increase in activity in Q1 2012, these factors continued to put pressure on deal volumes in 2012. However deal volume increased to 224 announced deals in Q4 2012, its highest level since Q4 2010 driven in part by the anticipated changes to the capital gains tax rates and also by an improvement in the US economy and an easing of concerns over the European debt crisis. The 10 largest transactions in 2012 represented $35.8 billion or 57% of total announced deal value. This compares with $60.5 billion or 85% in 2011. The previously mentioned acquisition of HSBC Holdings PLCs credit and retail services business in 2011 explains the majority of this net decrease. There were 14 mega-deals (transactions with a deal value greater than $1 billion) in 2012, just above the 13 mega-deals in 2011 but significantly below the 25 mega-deals announced in 2008 (the highest number in the last 5 years).

200

28 26 29 19 16 37 26 27 25 15 14 17 20

39 23

Deal volume

150

27

100

94

70

78 68

75

74

57

99

50

60
0 Q1 2011 Banks

71

65

52
Q4 2011

68

66

76

63

Q2 2011

Q3 2011

Q1 2012

Q2 2012 Other

Q3 2012

Q4 2012

Insurance

Asset management

Source: Thomson Reuters and SNL

Other financial services

Non-bank lending and other financial services companies accounted for 118 deals in 2012, up from 99 in 2011. This sector again accounted for the largest announced acquisitions of the year, with $27.3 billion in total disclosed deal value and 11 of the top 25 deals and the largest deal of the year in Intercontinental Exchanges $8.2 billion announced acquisition of NYSE Euronext in December 2012.

Other observations
Corporate buyers continued to dominate the financial services M&A landscape in 2012, representing 91% of total volume (699 transactions) and 85% of disclosed deal value ($52.8 billion). However, the number of PE announced deals increased from 40 in 2011 to 69 in 2012 with all four sectors contributing to the volume and growth. This represented PEs second most active year in the last five years with the increased availability of high yield

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A case for optimism in the face of uncertainty, 2013 US financial services M&Ainsights

Figure D: Top 25 US financial services deals announced in 2012 (by value)

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Month Announced Dec-12 Sep-12 Dec-12 Nov-12 Aug-12 Nov-12 Jun-12 Nov-12 Dec-12 Mar-12 Dec-12 Dec-12 Sep-12 Jan-12 Oct-12 Aug-12 Jul-12 Dec-12 Dec-12 Dec-12 May-12 Feb-12 May-12 Sep-12 Feb-12 Target NYSE Euronext Morgan Stanley Smith Barney International Lease FinanceCorporation International operations of Ally Financial Inc. Hudson City Bancorp, Inc. Jefferies Group, Inc. Business Property Lending, Inc. USI Holdings Corporation Aviva USA Corporation Pacific Capital Bancorp Knight Capital Group, Inc. Sun Life Financial Inc US annuitybusiness Citizens Republic Bancorp, Inc. Morgan Keegan & Company, Inc./ MK Holding Inc. Homeward Residential Holdings, Inc. TCW Group, Inc. FX Alliance Inc. Epoch Holding Corporation Duff & Phelps Corporation NGP Energy Capital Management SRLC America Holding Corp. Advance America, Cash AdvanceCenters, Inc. PlainsCapital Corporation The Hartfords individual life insurance business Crump Life Insurance Services Inc./ Crump Insurance Services Inc. Target Sector Other Asset Mgmt Other Other Banking Other Other Insurance Insurance Banking Other Insurance Banking Other Other Asset Mgmt Other Asset Mgmt Other Asset Mgmt Insurance Other Banking Insurance Insurance Acquirer Name Intercontinental Exchange Morgan Stanley Investor group General Motors Financial Company, Inc. Manufacturers and Traders Trust Company Leucadia National Corporation EverBank Investor group Athene Holding Ltd Union Bank, NationalAssociation GETCO Holding Company,LLC Guggenheim Partners LLC FirstMerit Corporation Raymond James Financial,Inc. Ocwen Financial Corporation Carlyle Group Thomcorp Holdings Inc. Toronto-Dominion Bank Dakota Holding Corporation Carlyle Group LP Jackson National Life Insurance Company Eagle U.S. Sub, Inc. Hilltop Holdings Inc. Prudential Insurance Companyof America BB&T Insurance Services, Inc. Acquirer Nation USA USA USA USA USA USA USA USA USA USA USA Canada USA USA USA USA USA Canada USA USA United Kingdom USA USA USA USA Value (in $ millions) 8,231 4,725 4,228 4,200 3,813 2,837 2,406 2,300 1,550 1,516 1,400 1,350 1,295 1,211 750 700 679 670 669 669 663 659 641 615 570 48,347 14,053 62,400 % of total 13.2% 7.6% 6.8% 6.7% 6.1% 4.5% 3.9% 3.7% 2.5% 2.4% 2.2% 2.2% 2.1% 1.9% 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.0% 1.0% 0.9% 77.5% 22.5% 100.0%

Top 25 transactions Other deal value Total disclosed deal value

Source: Thomson Reuters and SNL

An in-depth discussion

11

What this means for your business

Managing opportunity and risk

A successful approach for identifying and mitigating deal-breaking risks is critical when considering an acquisition, merger, or assetpurchase.
A recovering financial services M&A market has created significant opportunities for savvy investors who have demonstrated the ability to make shrewd decisions in an uncertain economic environment. As asset valuations and deal multiples stabilize, opportunities to generate incremental investment returns will be limited to investors who demonstrate the ability to fully understand the nature and impact of critical risks and opportunities in transactions. Both buyers and sellers will benefit from a well-planned due diligence effort that is carried out in a timely and cost-effective manner in order to identify and manage the opportunities and risks involved and ultimately execute a successful transaction.

What this means for your business

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About the data

We defined US M&A activity as mergers, acquisitions, shareholder spin-offs, capital infusions, consolidations and restructurings where acquisition targets are US-based companies acquired by US or foreign acquires. Transactions are based on announcement date, excluding repurchases, rumors, withdrawals and deals seeking buyers. Certain transactions were excluded from our analysis, such as real estate, managed care transactions, minority investments and asset/branch sales. Information relating to the asset management segment excludes minority investments less than 20% unless they were greater than $500 million. Additionally, the

asset management sector includes the following asset classes and/or fund types: hedge funds, mutual funds, wealth managers, collateralized loan obligations, private equity firms, asset management administrators and asset management trusts. M&A information was obtained from Thomson Reuters and SNL (unless otherwise indicated). PwC determined the appropriate sector classification based on each target companys primary business. The Other Financial Services segment in this publication includes transactions involving brokerage firms, investment banks, residential and commercial mortgage banks and other non-bank financial institutions.

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A case for optimism in the face of uncertainty, 2013 US financial services M&Ainsights

Acknowledgments
We would like to thank Damian Wright, Mark Friedman, Wade Tripp, Steven Sigrist, Andrew Barnett, Gregory Moss, Sanjay Ahluwalia, AdityaTole and Matthew Stopa for their contribution to this publication.

For a deeper conversation about Financial Services deal considerations, please contact one of our industry leaders or your local Deals partner: Martyn Curragh Partner, US Deals Leader 646 471 2622 martyn.curragh@us.pwc.com James Flanagan Partner, US Financial Services Leader 646 471 5220 james.f.flanagan@us.pwc.com East Scott Snyder Partner, Deals 267 330 2250 scott.snyder@us.pwc.com Central Mel Niemeyer Partner, Deals 312 298 4500 mel.niemeyer@us.pwc.com Phil Weaver Partner, Deals Banking Leader 312 298 5207 phil.weaver@us.pwc.com West Mark Ross Partner, Deals 415 498 5265 mark.ross@us.pwc.com New York Metro Gary Tillett Partner, Deals 646 471 2600 gary.tillett@us.pwc.com John Marra Partner, Deals Financial Services Leader 646 471 5970 john.p.marra@us.pwc.com Samiye Yildirim Partner, Deals Asset Management Leader 646 471 2169 samiye.yildirim@us.pwc.com

What this means for your business

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Notes:

Notes:

www.pwc.com/us/deals

About our deals publications: Published annually by our Financial Services specialists in our Deals practice, PwCs Financial Services M&A insights covers deal activity and trends in the US Financial Services industry.

2013 PwC. All rights reserved.PwC and PwC US refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. NY-13-0354