Financial institutions M&A sector trends: brokers/trading service providers — H1 2019 and outlook for H2 2019.

CURRENT MARKET

• Consistent, high activity levels

WE ARE SEEING

• Market consolidation across small/mid-cap UK and Western European broker dealers
• Larger investment banks encroaching on smaller ones in search of revenues (e.g., Rothschild's new corporate investor advisory service)
• Financial sponsors deploying buy-and-build strategies

KEY DRIVERS

• Declining revenue resulting from:
  • Unbundling of equity research costs, required under MiFID II
  • Overly brokered UK and Western European markets (i.e., too many competitors chasing the same deals)
  • Unfavourable macroeconomic conditions (e.g., sustained low-interest rates, weak equity capital/IPO markets, etc.)
  • Growing demand for "unorthodox" asset classes (e.g., cryptocurrencies), which traditional broker-dealers do not service
  • Increasing operational overheads (e.g., MiFID II compliance costs, uptick in regulatory penalties for systems & controls deficiencies, etc.)
• Fintech (lack of) reliance on broker-dealer services:
  • Availability of startup support (e.g., incubators, accelerator programmes, tech hubs and funding competitions) facilitating DIY early-stage fund raisings
  • Fintechs disrupting traditional models (e.g., SC Ventures Fintech Bridge) and providing automated stock-trading
• Local regulators encouraging domestic market consolidation

TRENDS TO WATCH

• Cultural/Management personality mismatches hindering deal execution and/or effective business integration
• Recalibration of broker business models—ultimately, resulting in fewer but more lean, efficient and diverse market participants

OUR M&A FORECAST

High levels of market consolidation are likely to continue in the short term as brokers seek scale to stay competitive in a sector disrupted by transformational regulation, technology and unfavourable market conditions.

Other financial services—Publicly reported deals & situations

Market consolidation

• Bryan, Garnier & Co: Acquisition of Beringer Finance (April 2019)
• Mediobanca: Acquisition of 66% of Messier Maris & Associés (April 2019)
• Catalyst Development & Sionic Advisors: Merger (April 2019)
• AllianceBernstein: Acquisition of Autonomous Research (April 2019)
• Shore Capital Markets: Acquisition of Stockdale Securities (April 2019)
• The Progeny Group: Acquisition of Innovate Financial Services (February 2019)
• FNZ: Acquisition of 9.1% of Embark (January 2019)

Mounting pressure

'Challenger' competition:

• Rothschild & Co.: Launch of corporate investor advisory service (February 2019)

Operational costs:

• Linear Investments: FCA fine of 1/3 net profits (c. £400,000) for inadequate market abuse systems and controls (April 2019)

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