professie en praktijk

TEKST MARCEL GROENENDIJK AND PAUL DE HEK GENERAL TRENDS IN FINANCIAL SERVICES INDUSTRY: MERGERS & AQUISITIONS

In 2006 and the first half of 2007, the consolidation of momentum, which delivered record M&A growth in the financial sector in general and the market 2006, is not likely to be sustained. The first five months in particular continued in the . Dutch of 2007 show a significant discrepancy between the key market players have mainly achieved additional growth trend indicators of deal values and volumes: the average via overseas expansion. This reflects the world-wide deal size rose, but the number of deals fell. The KPMG trend of internationalization in the financial services analysis shows that the appetite for M&A transactions industry. Pan-European and world-wide operating appears to be slowing, despite conservative balance financial institutions are starting to redirect their sheets. Of the major global regions, Europe remains the attention to the international mergers and acquisitions most positive in terms of potential M&A activity, due to market. rising PE momentum.

As a result of the economic revival, the prices of > see graphic 1 acquisitions have risen and the related sales processes have become more competitive. After several years of The Dutch financial services industry is strongly con- forced sales and focusing on core activities, corporate solidated and, at the present time, there is little private strategists have now returned to the mergers and equity activity. This is the opposite of, for example, the acquisitions (“M&A”) arena. M&A has shifted from a United Kingdom where the insurance sector is also buyers' to a sellers' market. The market players are regarded as a target by private equity. It can be expected now, however, much more experienced in the buying that in the coming years, private equity will get more and selling processes. A large amount of time used to interested in the certain aspects of the Dutch financial be spent on assessing acquisitions, but the ‘Anglo-Saxon services industry. The acquisition of NIBC by JC Flowers quick auction method’ is gaining in importance. This and subsequent sale to Kaupthing Bank is an example of trend is partly due to the increase in the professionalism private equity models being successfully applied to the of Dutch market players. financial services industry. However, the current credit crisis will clearly have an effect on the larger private The overall KPMG Global M&A Predictor (not insurance equity transactions, including those in the financial specifically; published at July 2007) predicts that the services arena.

Global M&A activity - number of deals vs average deal size

20,000 200

18,000 Number of deals 180

16,000 Average deal size value (USDm) 160

14,000 140

12,000 120

10,000 100

8,000 80

6,000 60

4,000 40

Number of deals 2,000 20

0 Marcel Groenendijk and Paul de Hek both work at KPMG 2003HY1 2004HY2 2004HY1 2006HY2 2003HY2 2002HY2 2005HY2 2007HY1 2001HY1 2000HY2 2002HY1 2005HY1 2006HY1 2000HY1 Corporate Finance as Director M&A 2001HY2 Financial Services respectively GRAPHIC 1 Associate M&A Financial Services Source: Thomson Financial Data, KPMG analysis 2007

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Increasing competition – especially in the non-life and while Aegon started a life insurance and joint health care insurance sectors – has also led to further venture in Taiwan. consolidation in the insurance sector, with the objective of utilising the economies of scale necessary for The non-domestic focus at large Dutch insurers can be building up a sound insurance company. As a result of observed at several world-wide insurance markets, continuous pressure on prices, limited growth especially at European and North American insurance opportunities in the traditional market areas and the companies. With capital bases of many (large) insurance outlook of increasing competition from banks, the companies having been sapped by the precipitous equity search for economies of scale will also remain the most market decline of the early 2000s, balance sheets have important driving force behind mergers and acquisitions now largely been repaired through increased solvency in the domestic insurance sector in the near future. ratios.

DUTCH INSURERS FOCUS ON GEOGRAPHICAL > see graphic 2 EXPANSION, BUT LACK OF SUITABLE TARGETS IS AN ISSUE KPMG conducted a world-wide survey at board Major Dutch financial institutions continue to focus on members of large insurance companies (May 2006). expansion abroad. A trend has emerged in which these Hereby larger insurance companies appear to be more organisations seek out acquisitions especially in East acquisitive than smaller companies in the past years. and South Europe. This is illustrated by the activities of Of insurance companies with premium income in excess and ING in countries like , of EUR 400 million 35% acquired at least one other and . We have also noticed substantial efforts to insurance business compared with 23% of companies obtain a foothold in emerging economies in Asia. with premium income of less than EUR 400 million. Especially China and India are viewed as attractive Responses show that the major factor preventing markets by virtue of size. However, Asian markets have companies from investing more in M&A is a perceived in practice limited opportunities as a result of govern- lack of attractive targets, followed by excessive price mental regulations allowing predominantly joint expectations by the seller, while lack of financial ventures or alliances only. There are also rumours that resources ranked third. Interestingly, factors such as Africa will receive more attention in the near future. legal and tax barriers and national government inter- ventions were low down on the survey list of major While SNS Reaal recently acquired AXA’s Dutch obstacles. insurance activities (including DBV and Winterthur), most large Dutch insurance companies move their M&A ONGOING CONSOLIDATION IMPACTS SIGNIFICANTLY interests towards East European and emerging markets. ON THE DOMESTIC INSURANCE MARKET Examples are Eureko’s (recent) interest in the Polish The merger between Univé and VGZ-Trias-IZA was an and Turkish markets (respectively PZU and Garanti), example of the increasing concentration of health insu- rance companies. The intended merger between Menzis, Agis and Delta Lloyd fell through at the last moment. Subsequently, Agis joined Eureko and Delta Lloyd rea- Domestic and cross-border insurance deals globally ched agreement with CZ. Further, Menzis recently sold its health care related income insurance portfolio to De 400 Goudse. Cross border 350 The market seems to have returned to normal following Domestic the introduction of the new health care insurance 124 300 system and the related policyholder transfers. By the 105 70 62 end of 2006, the number of people who changed health 66 69 250 insurance companies was 400,000 significantly less than at the time of introduction of the new system at which 200 circa 25% of all insured switched. Because continuing 150 competition is putting the prices of the basic insurance 246 238 246 package under pressure, companies in the sector are 234 217 218 100 being forced into looking into economies of scale and ways of reducing costs, e.g. by increasing purchasing 50 Number of deals power and continued focus on prevention. These developments, combined with decreasing solvency 2000 2001 2002 2003 2004 2005 ratios are expected to result in further consolidation.

GRAPHIC 2 The Dutch life insurance market has historically always Source: Thomson Financial Data, KPMG analysis 2007 been seen as relatively fairly consolidated. The top-6 ➤

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Global M&A activity in FS - number of deals vs average deal size – AZL in Limburg, which manages EUR 8 billion of 1,800 240 assets and provides pension schemes for approxi- mately 4,000 people, has been acquired by ING as per 1,500 200 April 2007; – MnServices merged its operations with PME (pension 1,200 160 fund for Metalektro) resulting in a total of EUR 79 billion assets under management and providing

900 120 pension schemes for circa 1.8 million people per year- end 2006. First step is PME outsourcing its asset management to MnServices as per July 2007 on a 600 80 fiduciary basis in exchange for an asset participation Number of deals - insurance in MnServices; 300 Number of deals - other FS 40 – As per July 2007 Aegon acquired Optas, an insurance

Number of deals Average deal size value FS (EURm) Average deal size value FS (EURm) FS deal size value Average company resulting from the former pension fund for 0 0 dockworkers, which had EUR 4.4 billion assets under management as per year-end 2006. 2006HY2 2003HY2 Recent research of Watson Wyatt (Watson Wyatt Update, 2001HY2 2002HY2 2005HY2 2007HY1 2001HY1 2000HY2 2004HY1 2002HY1 2005HY1 2006HY1 2004HY2 2000HY1 2003HY1 October 2007) substantiates the increased focus on out- GRAPHIC 3 sourcing the administration of pension funds. Source: Thomson Financial Data, KPMG analysis 2007 MARKET OUTLOOK We have seen that the overall KPMG Global M&A life insurance companies in the Netherlands hold Predictor (not insurance specifically) predicts that the approximately 82% of total market share (based on momentum, which delivered record M&A growth in gross premium income). Some of the remaining in- 2006, is not likely to be sustained based on a dis- dependent (relatively smaller) life insurance companies crepancy between the development of the number of have been rumoured as acquisition targets. However, deals versus average deal value. These developments given the consolidated environment price expectations are less clear within the global financial services at sellers can be seen as high. industry, where the volume of M&A deals is relatively Current market developments in the Dutch life insu- stable and the average deal size much more volatile. rance market being envisaged include increasing price By contrast, the number of M&A deals within the competition in less complex products, such as term insurance sector is relatively stable over the last eight assurances. Further, the current developments in the years at 155 per half year globally. fiscal environment in the Netherlands do not really enable the renewal and development of (new) life > see graphic 3 insurance products. Political initiatives on the banking annuity products offer The crunch at the credit market further strengthens outstanding product development opportunities for expectations of decreasing M&A activity. While primarily banking institutions from 2008 onwards, but might the banking sector and private equity are foreseen to be impose a threat for the traditional life insurance product harmed by the crunch, the insurance sector is expected offerings. to be faced with less difficulties regarding M&A appetite.

M&A ACTIVITY IN THE PENSION MANAGEMENT Insurers in both the life and property / casualty sector SECTOR IS INCREASING are once again looking at growth, particularly outside As most people in the Netherlands already participate in their often crowded domestic markets into regions a pension scheme, this market is not expanding rapidly offering greater revenue potential and higher margins. any more. It is, however, fragmented – there are Acquisition strategies in the last three years have been approximately 700 company pension funds in the driven by increasing profit and top line growth. Netherlands that have to be administered and are partly Expectations of increasing competition and new under own management. entrants will likely further fuel the drive for acquisitive Recent M&A activity show a trend to outsourcing and/or growth. However, growth through cross border consolidation to realise economies of scale in both acquisitions is expected to be partly restrained by pension administration as well as asset management: foreign regulations as a barrier. – Akzo Nobel has outsourced its pension fund manage- One of the main problems regards the scarcity of ment (approximately 51,000 participants including intended targets and appropriateness of pricing. pensionables) to , which was involved in a large number of transactions in 2006; ■

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