Our overview of the Top 10 Considerations for Financial Institutions in 2020 series noted that financial institutions will continue to face challenges in a number of corporate, compliance, and risk areas, especially in light of COVID-19 and a potentially slowing economy in 2020. As mentioned in the series overview, our first consideration is consolidation and merger activity. As 2020 evolves amidst economic uncertainty, prospects for growth through M&A have been muted. Robust merger activity continued in the first quarter of 2020 and was poised to continue throughout 2020 but has significantly slowed or been put on hold during the novel coronavirus shutdown. It is uncertain if or when this activity will return to pre-COVID-19 levels.
Until recently, valuations were healthy and banks and other financial institutions of all sizes were considering mergers or acquisitions both from the buy-side and sell-side. No matter how well the economy weathers the coronavirus outbreak, 2020 will clearly be a year of sharp decline in deal activity. Despite the M&A slowdown, financial institutions should be on the lookout for strategic M&A opportunities as the underlying factors for buying or selling branches or whole institutions may become even more pronounced in a negative economic cycle.
Fortunately, financial institutions are in a much better position to handle the fallout from COVID-19 compared to how they fared in the wake of the 2008 financial crisis. Capital levels are stronger, asset quality is better, and many of the regulatory enhancements of the last decade are proving to be helpful. Indeed, just before the COVID-19 pandemic arrived in the U.S., many financial institutions were actively discussing potential deals, targets, and the key metrics for growth.
Once we return to a more normalized work environment and the economy stabilizes, we expect discussions on potential deals to heat up. Those financial institutions not able to weather the COVID-19 storm and economic fallout will present strategic opportunities for investors and stronger financial institutions.
In any event, dealmaking in 2020 is unpredictable, but may gain positive traction in the second half of the year if the economy returns to work, albeit at a slower pace.
1. If you are at any stage of a deal right now, what are your options or alternatives, if any, given the COVID-19 impact?
2. As you consider growth in the future, what are the most important metrics for a prospective deal? Is everyone on board with those metrics?
3. Is your institution prepared for the merger or acquisition process regardless of having a deal on the table?
Howard & Howard has a dedicated team of financial services attorneys with deep experience handling complex transactional, regulatory, and litigation matters. Our attorneys regularly advise clients on M&A, strategic transactions, third-party engagement, enforcement matters, and regulatory compliance. For more information or for questions related to this Financial Institutions Advisory, please contact the author(s), your Howard & Howard attorney, or visit us at https://howardandhoward.com/services/financial-banking/.