Financial services firms go hunting in Europe, US

Drawing inspiration from Tata Steel and Hindalco, the financial services is out on an overseas marketing spree with about a third of them mulling M&A deals in Europe and North America, a report says.

According to a new survey conducted by consultancy major PriceWaterhouseCoopers, about 28 per cent of Indian financial services firms expect to buy stakes in European groups in the next five years and the same percentage intend to enter North America.

"Overseas acquisitions by industrial groups such as Tata Steel, Hindalco, Tata Motors and Ranbaxy are clearly proving inspirational," PwC said in its report.

Overall, Indian companies are particularly bullish with 76 per cent expecting to be involved in an M&A deal in the next five years, though only 34 per cent expect to do a deal in the coming year, the survey stated.

Even the ongoing credit crisis appears to have left the companies undaunted on their M&A strategies. In fact, about 59 per cent of Indian companies believe that credit crisis would increase M&A deals, the survey stated, adding that half of Chinese companies also shared a similar view.

"The attraction of cheaper assets is reflected in the survey results... Cheaper assets aside, there is another underlying imperative that is sustaining M&A in Asia's financial services sector. That is the need to continue to invest for growth or risk falling behind more ambitious competitors," it noted.

Firms that exercise excessive caution in the short to medium term could end up under-performing in the long term, PwC said. 

According to the report, Asian firms see little impact so far from the current credit crunch and overall 43 per cent of them believe that the credit turmoil could actually raise the volume of M&A deals in Asia.

The report quoted, David Eldon, former HSBC Chairman and a senior adviser to PricewaterhouseCoopers, as saying that "reduced demand from the West, and the US in particular, will compel Asian countries to trade more with each other." 

However, despite the optimism shown by survey respondents for the long-term, in the short-term there is a possibility that regulatory concerns may inhibit M&A. "Governments may put on hold further market liberalisation as they look at the contagious nature of the global credit crisis," it further quoted Eldon as saying.

In terms of M&A outlook for the current year, Chinese companies have emerged as most bullish, with 50 per cent believing they would undertake significant M&A deals this year. In the next five years, 71 per cent in China expect to enter into M&A deals.

While noting that Indian firms' aspirations go beyond the domestic market, the survey also found that the country would be the second biggest target for M&A deals in this sector after China.

Asked in which countries or regions the companies expect to conduct M&A activities over the next five years, China came on the top with 48 per cent, followed by 40 per cent preferring India as the target company.

Europe and North America come way down with only 17 per cent and 14 per cent, respectively, identifying them as the target regions.

In terms of countries or regions where the companies are expecting to conduct divestitures or sales over the next five years, India came at third position (15 per cent) after China (21 per cent) and North America (16 per cent).

Besides, India has emerged as the top region where the companies are expected to set up outsourcing arrangements over the next five years. While 40 per cent of the respondents said they expected their company to set up an outsourcing arrangement in India, it was followed by 28 per cent for China and 14 per cent for Singapore.

Asia-Pacific financial services M&A deals were up from $68.5 billion in 2006 to $105.9 billion in 2007, according to M&A Asia deal data released by PwC.

PwC's Transactions Leader in India Bharti Gupta Ramola said, India seems to have turned the corner from being a rising economy to a truly important one.

The fragmented Indian banking sector is seeing consolidation, like the merger of Centurion Bank of Punjab with HDFC Bank, which has created the third largest bank in India with a balance sheet in excess of 36 billion dollars."

In India, asset management is considered the most likely M&A target for financial buyers this year, while in next five years, M&A activity in the country is expected to be more focused on retail and private banking, in addition to asset management.

There may also be opportunities in the Indian life insurance sector, which was opened to private investment a decade ago and is growing at 5,070 per cent a year, PwC said.

Strong and steady GDP growth and the continued emergence of a wealthy consumer class in Asia have created a fertile environment for further M&A activity in financial services, the report added.