| Artículo | Junio 2022 | M&A de servicios financieros en España: características clave para las operaciones de banca privada |
The financial services (FS) sector in Spain has been extremely active in terms of M&A transactions in 2021, despite its generally perceived flatness. In the financial and insurance industries, 226 deals were closed in the Spanish market in 2021, according to the Transactional Track Record (TTR) M&A database.
But these numbers for 2021 are not an exception: FS M&A has been a relevant sector in terms of deal value and number of transactions over the last decade. Indeed, FS M&A has been, and remains, buoyant across Europe.
Defining ‘financial services’ in the Spanish market can be tricky as it differs from other jurisdictions. We define it as a set of entities that have the ability to perform activities that have been traditionally subject to licensing or registering obligations. These activities have been historically performed by banks – credit institutions that conducted myriad activities and transactions within the industry.
Nowadays, with an atomised market, FS entities are active in deposits, payments, credit and investment services (i.e., investment funds, private equity funds, asset management entities, investment services companies and crowdfunding platforms) in accordance with European Union (EU) regulations.
Evolution since 2008: cold mergers, distressed M&A and back to business
The 2008 financial crisis triggered significant changes and concentration through M&A across the Spanish FS industry. In particular, the most significant part of the Spanish retail banking sector, through eight main absorbing conglomerates (Santander, BBVA, Bankinter, Abanca, Caixabank, Sabadell, Unicaja, Kutxabank and Ibercaja) merged more than 60 institutions into just 10 banking groups.
This concentration process started with the so-called ‘cold mergers’, in which Spanish saving banks which were on the verge of collapse due to a lack of access to capital markets and the rigid composition of their capital structure, created newly incorporated financial entities. Saving banks – which, unlike retail banks, were not companies and had no shareholders – could not pursue a traditional merger process. Through ‘cold mergers’, they instead transferred and consolidated their financial business into these newly created financial entities.
Following the end of the cold merger period in 2012 and, among other reasons, to avoid a government bailout, Spain adopted a banking resolution framework that was later enshrined in the Bank Recovery and Resolution Directive (BRRD). This overlapped with the early years of cold mergers and was basically distressed driven, with intervention by the regulatory authorities, including the Spanish executive resolution authority (FROB).
Retail banks, however, pursued a number of traditional mergers. The market typically referred to them as ‘acquisitions’, as they consisted of a large entity absorbing a smaller one. But the legal mechanism used to carry out these ‘acquisitions’ was actually through a merger, usually after a competitive bidding process.
A significant number of asset deals followed. The banking sector sold a huge volume of non-performing loans (NPLs), with and without collateral (typically real estate collateral). Massive sales of real estate owned (REO) property were carried out as well. The banking sector also refocused on its core business and divested ancillary activities, such as real estate servicer businesses.
Current industry-specific trends
In the Spanish financial sector, retail banking is still the norm. In other words, the big names of Spanish retail banking continue to account for a significant amount of business in the sector.
Medium and small-sized banks are now in the spotlight for potential M&A transactions, continuing the concentration process that began after the 2008 crisis. It should be noted that classic FS has experienced reduced margins due to, among others, years of low interest rates in the eurozone and more demanding solvency and regulatory requirements. Therefore, consolidation has continued as a trend.
Along with the foregoing, we have seen the eruption of new business models, mainly FinTechs. Though initially it was unclear whether FinTechs would take a competitive or cooperative approach toward legacy FS players, it seems that cooperation − at least to some extent − is increasingly popular. The interaction and consolidation between FinTechs and legacy players has certainly contributed to M&A activity as well.
A key trend that is currently affecting business operations and also driving M&A transactions in the FS sector is technology. FinTechs have helped FS to focus on technology, including big data, blockchain and digitalisation, among others. This shift toward technology is changing certain essential aspects of how financial institutions are managed.
Approval of the guidelines on outsourcing arrangements by the European Banking Authority (EBA) has been another sign of change in the industry. Outsourcing is supposed to reduce costs and improve flexibility and efficiency, in order to, ultimately, enhance profitability.
When it comes to Spanish private banking, the sector is much more diverse than retail banking. The term ‘private banking’ does not refer to a specific company type or a specific service, so a wide range of entities that belong to the FS sector tend to fall into the private banking category. Some private banks hold a proper banking licence, although this used to be uncommon since not all services typically rendered by private banks require a banking licence.
Private banking is often carried out through a combination of less burdensome regulated entities (asset management entities, investment services companies, etc.). The trends set out above, together with the flat – or even negative – interest rate environment, and the need to manage an increasingly higher volume of assets under management (AUM) to meet regulatory driven costs, is boosting M&A activity involving private banking entities.
Key features on private banking M&A
Each transaction has its own particularities, depending mainly on the nature of the target. However, certain aspects are relevant in a wide range of deals.
Deal structure. The transaction can be structured as a share deal or an asset deal, or a combination of both. From a practical standpoint, share deals tend to be easier and more straightforward to implement. Through share deals the target business is acquired by virtue of the acquisition of the shares of the relevant company, whereas asset deals entail the individual acquisition of the elements that comprise the business in question.
Given that the nature of the business being acquired depends very much on its relationship with clients, structuring the transaction through an asset deal increases the risk of losing existing clients during the onboarding process.
Deal structure depends on various factors, such as taxation and regulatory matters. It is highly advisable to analyse the pros and cons of each structure at the outset, before implementing the chosen option.
Conditions precedent and interim periods. Transactions concerning FS businesses include, as a rule, various conditions precedent to be fulfilled – or waived, to the extent legally possible − before completion. Those conditions precedent can be classified in two groups. First, those to be included because of mandatory laws, such as the obtention of approvals or consents by relevant regulatory authorities. Second, those that are included due to certain particularities of the target, such as obtaining third-party consents for change of control provisions in key business agreements that are common in the FS industry.
As these transactions need a deferred closing structure, regulation of the interim period (typically exceeding six months) is key to transaction success, and to avoid deception of the parties that can lead to burdens, losses and potential litigation.
Key employees. Retaining key employees is a common concern in any M&A transaction. However, it becomes essential in acquisitions where the core business is asset management, such as private banking. Retention can assist with smooth onboarding of the client base, and preserve a minimum asset under management volume post-closing. As a result, it is necessary to carefully arrange appropriate retention mechanisms from the beginning of the transaction.
Third-party consents. Change of control provisions are commonly seen in certain business agreements which may be critical to business continuity. These include asset management agreements entered into with institutional clients, custody agreements, cash management, core IT licensing and maintenance agreements. It is important to plan ahead for third-party consents, as they can become a key element and affect the timing of the deal.
Due diligence. Certain aspects of the target business should be thoroughly analysed during the due diligence process to minimise not only hidden legal risks and issues, but also potential reputational damage to the buyer. Topics include compliance with transparency and investor protection regulations, anti-money-laundering (AML) and know your customer (KYC) regulations, information technology (IT), business agreements with institutional clients, and data protection.
Transition service agreements (TSAs). In certain transactions the seller assists the target and the buyer post-closing, so that the acquired business can continue on an ongoing basis. This typically occurs when the target is part of a larger business owned by the seller, or in asset deals. An example is when acquiring business units from a legacy FS player. TSAs entail a number of issues related to licencing and sublicensing of IT, data protection and labour, among others, that need to be carefully reviewed.
Purchase price and price adjustments. The price is typically tailored to the specifics of the transaction. In share deals it is either structured with a locked box or a closing accounts mechanism. Whatever the deal structure (i.e., share deal or asset deal, or a combination of both), M&A transactions involving private banking entities usually include earn-out provisions based on the assets under management that remain in the target after a certain period post-closing, so as to ensure a proper business onboarding and avoid overpaying for client relationships that are not successfully retained by the target.