Financial Institutions MA Key Trends and Outlook

I. BEGINNING OF A RESURGENCE SETS THE STAGE FOR A MORE ROBUST M&A MARKET IN 2025

Financial institutions M&A in 2024 was constrained by a challenging regulatory environment and continued fallout from high interest rates, but there were notable signs of an emerging resurgence of M&A during the year and well-founded reasons for an optimistic outlook. The interest rate cuts by the Federal Reserve in the second half of the year and the change in presidential administration have spurred hopes for an improving economic environment and significant change in regulatory policy and personnel. Financial institutions M&A was led by Capital One’s $35.3 billion acquisition of Discover, which was one of the largest announced M&A transactions globally across industries and the largest announced bank M&A transaction in the United States since the financial crisis. The transaction is distinctive in combining elements of a fintech payments transaction and bank acquisition. Even excluding the Capital One/Discover transaction, U.S. bank deals with an aggregate deal value of $16.3 billion were announced in 2024, surpassing transaction volumes for 2023 and 2022 combined. There was also rich activity in the asset management, fintech and insurance brokerage sectors. However, as with deal activity generally across industries, the M&A activity in the financial services sector continued to trail M&A levels that preceded the Biden Administration.

During recent years, financial institutions have faced significant M&A headwinds, including geopolitical instability, elevated inflation, high interest rates, volatile equity markets, enhanced regulatory and antitrust risks, and fears of a potential recession and declining credit quality. Underwater fair market values for securities portfolios and other balance sheet assets resulting from rapidly rising interest rates in 2022-2023 contributed to the successive failures of Silicon Valley Bank and First Republic in 2023, prompting a loss of investor confidence across the bank sector and contributing to a defensive posture by many institutions. The merger math for potential deals became challenging if not impossible given the requirement to mark to market the target’s balance sheet. During 2024, negative macroeconomic factors began to improve with the Federal Reserve cutting interest rates by 100 basis points in the second half of the year as inflation showed signs of cooling, and the U.S. economy continued to demonstrate resilience and increasing confidence in a “soft landing” from the Federal Reserve’s hard pump of the brakes in late 2022 and 2023. As of this writing, while the economic environment is more favorable than a year earlier, there are various indicators that interest rates are likely to be higher for longer than was expected a few months ago.

The regulatory environment in 2024 remained challenging across financial services generally. Supervisory expectations quickly ratcheted up following the 2023 bank failures. Regulators focused on liquidity risks, governance and risk management, and commercial real estate exposure, as evidenced by the challenges faced by New York Community Bank in early 2024. The CFPB sought to expand its policy-making role by aggressively pursuing multiple enforcement actions against banking organizations, including a flurry of actions in the waning days of the Biden Administration. The CFPB also expanded its supervisory role beyond banking by adopting a rule subjecting large non-bank companies offering digital funds transfer and payment apps to CFPB supervision. The SEC continued its crackdown on cryptoassets through numerous enforcement actions and also continued to bring actions against investment advisers and broker dealers for recordkeeping failures due to the use of so-called off-channel communications. The regulatory environment specific to M&A also remained unfriendly as the time period for regulatory approval of bank M&A transactions remained protracted, the OCC and FDIC finalized bank merger guidance following proposals in early 2024, the Department of Justice (“DOJ”) officially departed from longstanding guidelines for reviewing bank M&A transactions and antitrust authorities continued to investigate and challenge transactions across industries. As we have written previously and as evidenced by the increased bank M&A activity in 2024, certain of the bank regulators throughout this period remained open to bank consolidation under the right circumstances. Nonetheless, the heightened perception of increased regulatory risk and the very real expense and distraction created by lengthy and more onerous review processes, along with opposition by vocal political groups against M&A activity, stopped many potential transactions from ever being proposed.

As we discuss in more detail below, the change in presidential administration has provided a burst of optimism for a return to a normal regulatory environment, which — coupled with a more favorable economic environment — lays the groundwork for more robust M&A activity for financial institutions in 2025, although it will take some time for the full impact of the change in regulatory policy and personnel to be realized.

II. FINANCIAL SERVICES SECTOR-BY-SECTOR 2024 REVIEW AND OUTLOOK FOR 2025

A. Banking Organizations

1. Capital Raising Activity Demonstrates Renewed Investor Interest and Confidence in Banking Organizations as 2023 Liquidity Crisis Fades to Rear View

2024 witnessed significant progress and return of investor interest and confidence in the sector following the 2023 bank failures. Those failures arose out of a liquidity crisis spurred by banks and bank regulators being caught unprepared for the Federal Reserve’s campaign to combat inflation by raising interest rates rapidly beginning in late 2022 and accelerating during 2023. While the story of bank M&A in 2023 was one of FDIC-assisted transactions, there were only two small FDIC-assisted deals in 2024 and one of those, Republic First Bank, was a holdover from an initial FDIC process in late 2023.

Importantly, private sources of capital were willing to come to the aid of institutions facing distress. Institutions took steps to shore up liquidity measures in respect of uninsured deposits and to avoid a liquidity crisis, providing the necessary time for the sources of private capital to conduct diligence and reach agreement on capital raising terms. The successful $400 million raise by Banc of California of private capital from Warburg Pincus and Centerbridge in connection with its acquisition of troubled PacWest in 2023 created a blueprint for institutions to raise capital from private equity investors through a private offering of common stock (or preferred stock convertible into common equity upon receipt of necessary shareholder or antitrust approvals) and warrants. New York Community Bancorp faced weakness in its multifamily commercial real estate portfolio coupled with difficulties satisfying enhanced capital and regulatory requirements as an institution that appears to have been unprepared for its rapid increase in size to over $100 billion in assets following the acquisitions of Flagstar and Signature. Following a precipitous stock market decline, New York Community Bancorp raised $1 billion in private capital from Liberty Strategic Capital, Hudson Bay Capital Management LP and Reverence Capital Partners. In mid-2024, First Foundation, which similarly faced weakness in its commercial real estate portfolio, raised $228 million in capital led by Fortress Investment Group.

Capital raises in 2024 were not limited to distressed situations or to expensive private capital. Public capital raises often facilitated by overnight “wall-crossings” became a prominent feature of bank M&A transactions to offset capital dilution caused by the required write down of underwater securities portfolios to fair market value and to preemptively satisfy higher regulatory expectations for capital levels. Several of the largest bank M&A transactions in 2024 were accompanied by capital raises that were announced on the same date as the acquisition. UMB Financial, Renasant, WesBanco and Old National all successfully raised common equity through the public markets in connection with their announced acquisitions of Heartland, First Bancshares, Premier Financial and Bremer, respectively. Fulton’s FDIC-assisted acquisition of Republic First was also accompanied by a successful concurrent common equity raise. The success of these capital raises evidenced confidence from investors that the underlying transactions would ultimately be approved by the bank regulators, as these capital raises were completed at announcement and not conditioned on closing of the acquisitions.

Following the presidential election, there was a palpable increase in investor enthusiasm for bank stocks, evidenced by the immediate jump in share prices followed by the reopening of the capital markets for bank offerings unrelated to M&A. Four banks, led by Valley National’s $460 million offering on November 7, successfully executed common stock offerings that were also well received by existing investors. The Valley National offering involved a “wallcrossing” executed during trading hours over a single day that allowed the bank to publicly launch and price the offering within a short period of time following the market closing to limit execution risk. These capital raises allowed each of the banks to boost its capital ratios, including to offset reserves relating to commercial real estate, with two of the banks also stating that they planned to apply the proceeds towards balance sheet optimization strategies. This represented a continued evolution in the reopening of the public capital markets for common issuances, which following the 2023 bank failures, had effectively been closed to banking organizations with the exception of offerings in connection with M&A transactions discussed above or other unique growth stories.

The market rally in bank stocks lost some ground after the Federal Reserve’s indication that the pace of interest rate cuts was expected to slow in 2025 with inflation not receding as quickly as hoped, but the regional bank indices still finished the year up approximately 30%. We expect more banks will look to build off the success of these institutions and look to raise common equity capital in 2025.

2. Well-Positioned Acquirers Seize Opportunities and Kickstart a Resurgence in Bank M&A as Deal Activity Rebounds in 2024

The most exciting development in financial services M&A in 2024 was Capital One’s $35.3 billion agreement to acquire Discover in an all-stock transaction — the largest transaction in financial services and one of the largest transactions globally for 2024. This transaction is a prominent example that for potential value creating deals with very strong, and potentially transformational, strategic logic, some parties were willing to act rather than wait to see whether the election year would herald a different regulatory environment. Capital One has a history of bold dealmaking during times of economic and regulatory disruption. It acquired Chevy Chase Bank during the financial crisis and then acquired ING Direct in a $9 billion acquisition that represented the largest post-financial crisis bank transaction, which it followed quickly thereafter with the acquisition of HSBC’s large U.S. credit card business.

When opportunities arise during times of stress, a well-prepared acquirer with strong leadership, strategic vision and conviction can seize the moment. Prior to the announced acquisition, Discover had a number of recent and well-publicized compliance issues, including an FDIC consent order. Capital One has laid out a compelling strategic rationale for how the transaction will enable greater competition with Visa and MasterCard by strengthening and increasing the value of the Discover network for merchants and consumers while also providing a platform for Capital One to compete with the largest U.S. banks. There have been pockets of criticism against the deal with general assertions that any M&A transaction of size is bad for consumers or competition, but Capital One has articulated the benefits of the deal across constituencies and in multiple fora, including in an all-day public meeting held by the Federal Reserve and OCC during which the number of proponents for the deal far outweighed those in opposition. As part of its community outreach, Capital One announced a community benefits plan of more than $265 billion in lending, investing and philanthropy over five years, which is more than twice as large as any other community commitment developed in connection with a bank acquisition. The transaction continues to proceed through the regulatory approval process and is expected to close early this year.

There were several other significant bank M&A transactions in 2024, including SouthState’s $2 billion acquisition of Independent Bank Group and UMB’s approximately $2 billion acquisition of Heartland Financial. These two transactions were announced within three weeks of each other in late spring and represented the largest bank transactions (other than the Capital One transaction) in the last few years. Importantly, all four of the parties to these transactions were strong companies with healthy balance sheets, and none had significant geographical overlaps with their merging counterparties that would raise competitive concerns. As a result, each transaction offered the benefits of scale and expansion into attractive new markets. In addition to having nearly equivalent deal values, the two transactions share a number of common features. Both are all-stock strategic mergers with traditional fixed exchange ratio structures, without any collars, ticking fees or complex pricing mechanisms, and with no unusual conditions, termination rights or walk-away provisions. The merger agreements for both transactions were generally reciprocal from a closing certainty and deal protection perspective, and included a strong mutual commitment from both parties to use the necessary efforts to secure required regulatory approvals. Because both UMB and SouthState are regulated by the Federal Reserve at the holding company level and by the OCC at the bank level, each transaction required regulatory approvals from those two federal agencies alone. The SouthState transaction closed in early 2025, and UMB has received all regulatory approvals and expects to close by the end of January 2025.

Deal activity continued to pick up in the second half of the year with several sizeable transactions announced, including Atlantic Union’s $1.6 billion acquisition of Sandy Spring, Old National’s $1.4 billion acquisition of Bremer, Renasant’s $1.2 billion acquisition of First Bancshares, and Brookline’s $1.1 billion merger-of-equals with Berkshire. These announcements raised the total number of deals over $500 million for 2024 to 11, which is more than double the number of deals over $500 million announced in 2022 and 2023 combined.

Much was written over the last few years about the challenging regulatory environment, both for financial institutions mergers and for M&A more broadly across industries. Most recently, the federal bank regulators evidenced discord as to the merits of bank mergers, with the Federal Reserve and OCC being more receptive to bank mergers than the FDIC. We have maintained throughout this period that the Federal Reserve and the OCC would continue to approve bank mergers of healthy institutions that satisfied the relevant statutory factors, including with respect to competition. Notably in each of the Capital One/Discover, SouthState/Independent Bank Group and UMB/Heartland transactions, the acquiring company is regulated by the Federal Reserve and OCC. However, the regulatory analysis and planning cannot end there. Critically important in the deal planning process is a comprehensive understanding of the regulatory approval process, a candid evaluation of the likelihood of and obstacles to regulatory approval, and a robust strategy for proactively engaging with the bank regulators, antitrust authorities, community groups and the public. Also critically important is planning for the post-closing integration of the two companies and preparation to meet regulatory expectations with very little grace period post-closing. The termination of First Sun’s acquisition of HomeStreet, discussed in Chapter 8, illustrates the potential pitfalls of trying to pivot the regulatory approval strategy mid-transaction.

3. Election Sets the Stage for a Return to Normal Regulatory Environment in 2025

As 2025 begins, we believe that there is significant reason for optimism for a “return to normal” for regulators and investors that will lead to a robust bank M&A market. Bank M&A during the Biden Administration reached a nadir in deal value compared to prior recent administrations, and compared especially negatively to deal activity during the first Trump Administration. The regulatory environment was challenging on many fronts with heightened supervisory expectations, particularly following the failure of Silicon Valley Bank, resulting in an increased number of institutions being in the penalty box and unable to engage in transactions.

Data from the most recent supervisory report from the Federal Reserve, covering the first half of 2024 shows that two-thirds of large institutions did not have satisfactory ratings across all three Large Financial Institution (LFI) rating components — thereby being restricted from engaging in significant deal activity — with the primary reasons for the downgrades being governance and controls and interest rate and liquidity risk management. In 2020, that number was approximately 40%, showing a dramatic increase in supervisory issues during the Biden Administration. In the sub-$100 billion asset category, Federal Reserve data also showed a growing recent trend of supervisory findings and an increase in the number of institutions with unsatisfactory ratings.

Banks and regulators have also engaged in open conflict on required capital levels for institutions over $100 billion in assets with Basel III endgame still up in the air, bank trade groups litigating against the regulators’ stress tests over a lack of transparency and the relations between banks and the CFPB becoming increasing adversarial. This regulatory environment and the constant focus on capital requirements have made many banking activities uneconomical even for the largest banks, which has resulted in the growth of private credit and financial technology that sits outside of the bank regulatory perimeter. A “return to normal” will mean a supervisory approach that is rightly focused on the safety and soundness of the institution being supervised, including regarding liquidity risks, while providing certainty and transparency around required capital levels and stress tests and clear expectations for compliance. That will result in more banks being able to engage in bank M&A and management teams with increased visibility and certainty in the supervisory expectations that they will face upon completion of a transaction.

We also expect more expedited regulatory approvals for bank M&A. As we have noted previously, while the FDIC has been unreceptive to bank M&A transactions, the Federal Reserve and OCC have been receptive to bank M&A that satisfied the specified statutory factors. However, the data show that approval timelines even by the Federal Reserve were significantly longer (and growing) during the Biden Administration. Based on the data released in the Federal Reserve’s most recent semi-annual report, the average processing time by the Federal Reserve for a bank merger application in the first half of 2024 was 100 days as compared to 69 days in 2020, representing an increase of approximately 45%. This reflects M&A transactions of all sizes, though processing time for larger transactions is significantly longer due to the complexity and receipt of public comment letters. Per the Financial Times, transactions with deal values over $500 million have averaged 10 months to closure under the Biden Administration compared with six months under the first Trump Administration, even though deal volume has been down significantly during the same period especially for larger transactions. A lengthy approval time delays the economic benefits of a merger, creates increased risk of employee attrition and distraction for the management team during the pendency of a transaction, puts a halt to capital investment and other strategic initiatives by the acquirer and target and creates heightened risk that a macroeconomic event (such as interest rate movements or liquidity pressures at other banks) or other externality could derail a transaction or change the underlying deal calculus.

One of the biggest unknowns during the Biden Administration was the approach that the DOJ would take in reviewing bank mergers. Then Assistant Attorney General Jonathan Kanter gave a speech in June 2023 that made clear that the DOJ intended to be more aggressive and less willing to share views that would allow parties to satisfy whatever concerns the DOJ may have regarding a given transaction, but provided little guidance regarding how the DOJ would review transactions under this new approach.

The DOJ finally announced in September 2024 its withdrawal from the 1995 Bank Merger Guidelines, stating that it will instead rely on the 2023 Merger Guidelines — which apply to all other industries — in evaluating the competitive effects of bank mergers and issuing a short “banking addendum” to be used together with the 2023 Merger Guidelines. The banking addendum contains little guidance as to how the 2023 Merger Guidelines will apply with any specificity to bank mergers. Although the banking agencies had joined the 1995 Bank Merger Guidelines when adopted, the banking agencies notably did not join the 2023 Merger Guidelines or the new addendum. The Federal Reserve has since confirmed (including in a recent merger approval order) that it will continue to use the 1995 Bank Merger Guidelines for its competitive review of bank mergers. We are optimistic that the Trump Administration, including the DOJ, will be friendlier to M&A and that this will lead to a return to a more favorable and predictable antitrust review of bank mergers. However, the politicization of antitrust policy may be here to stay, and merger parties should be thoughtful around the implications for how different bank regulatory agencies are likely to implement competition analysis and on impacts to communities and employees that may draw political attention.

The great irony of the policy position that bank mergers are anti-competitive is that the biggest banks have grown market share considerably during recent years due to organic growth resulting from significant economies of scale and a perception of being “too big to fail.” We believe these dynamics can be countered only by mergers among the regional banks. As PNC cited in its 2024 comment letter to the OCC, the two largest banks in the U.S. have grown by nearly $2 trillion in assets alone since 2019, a jump that is greater than the size of PNC, U.S. Bank and Truist combined (based on year-end 2023 data). Competitiveness with the biggest money center banks is not a concern just for the largest regional banks but also for smaller regional and community banks that compete in the same markets as the largest banks.

B. Fintech

The largest and most significant fintech transaction announced in 2024 was Capital One’s $35.3 billion acquisition of Discover. While both entities are bank holding companies, the primary strategic rationale is based on the non-bank network at Discover. Capital One emphasized in its announcement release that the transaction presented a singular opportunity to build a payments network that can compete with the largest payment networks and payment companies. The Discover network is one of only four U.S.-based global payments networks. Although today it is the smallest of those networks, the Capital One acquisition will add scale and investment to the network and accelerate Capital One’s strategy to work directly with merchants to leverage its customer base, technology and data ecosystem to create value for merchants and customers.

Without the uniquely situated Capital One/Discover transaction, fintech deal value would have been down slightly compared to 2023, which itself was a down year for fintech M&A, and the number of transactions also declined year over year. Fintech and payments continue to be a highly competitive industry and one that requires significant investment to build a business to scale. The higher interest rate environment coupled with an adverse antitrust and regulatory environment increasingly focused on technology companies and larger deals had a negative impact on fintech M&A. Fintech companies have also historically been significant participants in the IPO market, which remained tepid in 2024. Klarna, the Swedish buy now pay later (BNPL) company, made a confidential IPO filing in the U.S. in November 2024. The filing indicated that it may finally go public in 2025 if market conditions are positive, although its targeted valuation of approximately $15 billion would be a significant drop from its peak valuation of $45 billion in 2021 — prior to the shift in interest rates.

FIS completed the sale of a majority stake in its Worldpay Merchant Solutions business to GTCR in a transaction that valued the business at $18.5 billion, including $1 billion of consideration contingent on returns realized by GTCR realizing certain thresholds. FIS stated that the transaction would simplify its operations and create a more focused company with a stronger balance sheet. Global Payments similarly announced an initiative to focus on its core business and announced a transaction to divest it medical software business to investment firm Francisco Partners for $1.13 billion. These transactions also highlight the continued prominence of private equity in the fintech industry. Two of the largest fintech deals in 2024 involved private equity — the acquisition of Canadian fintech Nuvei Corp. for $5.04 billion by an investor group led by Advent International and the acquisition of Envestnet for $4.31 billion by an investor group led by Bain Capital. Another notable fintech transaction was BlackRock’s acquisition of UK fintech Preqin for $3.22 billion. BlackRock was a very active acquirer in 2024 in the investment and wealth management sector, as discussed below, and the acquisition of Preqin is intended to add a complementary private markets data business to BlackRock’s investment technology as investors increase allocations to alternative investments.

There were other interesting developments at the intersection of banking and financial technology in 2024. So called “neobank” Synapse declared bankruptcy in April 2024, and many customers were left without access to their funds and without the benefit of deposit insurance, highlighting a significant difference between the failure of an FDIC-insured institution and the failure of a non-bank platform. Synapse had a partnership with four banks, the most prominent of which was Evolve, where it would deposit customer funds. Synapse apparently commingled customer funds that it deposited at these banks and neither Synapse nor the banks have been able to account for the missing funds. Following the Synapse failure, the FDIC has proposed a regulation that would require partner banks to be responsible for the recordkeeping for custodial accounts for bank deposits received from third-party non-bank companies.

As we head into 2025, we believe that technology will continue to be an issue of critical importance and value for financial institutions across all sectors, and fintech companies will help create opportunities for innovation and drive disruption. Areas of significant interest will continue to include artificial intelligence as well as data and cybersecurity more generally. A strong economy should help spur customer demand, and a lower interest rate environment compared to a year earlier will reduce funding costs and help drive growth for businesses where much of the value for investors is in future cash flows. A less restrictive regulatory environment should also help facilitate further consolidation in the fintech sector, although deals involving large technology companies are expected to continue to attract scrutiny under the new administration.

C. Investment and Wealth Management

2024 witnessed significant activity within the investment management industry in deals both large and small, although the industry was not immune to the general M&A headwinds. BlackRock helped start the year with an agreement to acquire Global Infrastructure Partners, an infrastructure firm with over $100 billion in assets under management for $12.5 billion, with 30% of the consideration deferred for five years and subject to satisfaction of certain post-closing conditions. BlackRock then helped end the year by announcing a $12 billion deal to acquire HPS Investment Partners, a global credit investment manager with ~$150 billion in assets with a strong private credit franchise.

As in other recent years, private credit dominated the news and the M&A landscape. In addition to BlackRock, other firms participating in private credit M&A space included Janus Henderson, with its acquisition of a majority stake in Victory Park Capital Advisors and all of Dubai-based NBK Capital Partners, and Blue Owl (long one of the most significant competitors within private credit) acquired credit manager Atalaya.

While some have questioned whether the increased focus and competition within private credit over the past several years could signal the end of the private credit run, private credit appears to have significantly more runway. Where banks have pulled back in lending through the years in view of regulatory and other considerations, private credit has filled the gap and then some. With greater flexibility born at least in part from the lack of regulatory (including capital) requirements and oversight, private credit has grown from negligible at the time of the global financial crisis into a multi-trillion dollar business that some industry observers and participants have said could double (or more) over the next half decade (and beyond). Envious of the high returns, banks have started looking for ways to participate in the private credit boom, as evidenced by JPMorgan and Citi announcing partnerships with private credit funds in 2024.

On the opposite end of the size spectrum, BC Partners announced a portfolio acquisition of Runway Growth Capital, an investment manager specializing in advising business development companies. While the closed-end fund structure has not brought private credit opportunities to retail investors in scale, the BDC model is interesting in its ability to allow retail investors to participate in a unique space within the market. 2024 also witnessed a number of BDC/BDC mergers, including among BDCs with common advisors, such as Blue Owl and Golub Capital.

Traditional asset managers acquiring traditional asset managers saw limited activity over the past year, although Victory and Amundi SA announced a significant transaction in which Amundi sold its U.S. investment manager (the former Pioneer Investments) to Victory Capital in exchange for a ~25% economic interest in Victory. As in past similar deals, the parties touted the anticipated benefits of size and scale, some product diversification and significant anticipated expense synergies, as well as an expanded non-U.S. distribution opportunity.

In addition to private credit, a related theme from prior years continued into 2024: the confluence of asset management and insurance. While asset managers acquiring insurance companies has been a trend, MetLife recently announced an agreement to acquire PineBridge Investments from Pacific Century Group. MetLife also announced a transaction with General Atlantic to form a new Bermuda-based reinsurance company that will have a strategic reinsurance partnership with MetLife and will use MetLife investment management and General Atlantic as exclusive investment managers for the new company.

Also during 2024, Japan’s Dai-ichi Life Holdings took a minority stake in Canyon Partners, an alternative investment manager, with an option to increase its holdings over time to up to 100%, and also made a significant capital commitment to Canyon’s funds. Dai-ichi explained in its press release that it saw the deal as a way of strengthening its overall business portfolio and enhancing its access to alternative asset management capabilities. Most recently, Sixth Street and Northwestern Mutual Life Insurance Co. entered into a transaction in which Northwestern invested in Sixth Street and entered into an arrangement for Sixth Street to manage $13 billion of capital for Northwestern Mutual. Northwestern noted that the transaction gave it expanded access to private investment opportunities.

D. Insurance Underwriting and Brokerage

M&A among insurance underwriters was generally subdued in 2024, although many companies kept busy with activities geared towards managing risk exposure and capital efficiency. Among other things, these activities included numerous firms in the life and annuity space announcing significant block reinsurance transactions throughout the year. Other companies worked to exit non-core assets, including AIG, which sold all but the last 9.9% of its ownership of Corebridge by way of a $3.8 billion sale of a portion of its stake to Nippon Life, and Lincoln National, which exited its wealth management business.

There were some highlights within traditional M&A, and one of the largest U.S. insurance underwriter transactions was the $5.1 billion purchase by an investor group led by Sixth Street Partners of Enstar Group, a unique reinsurer focused on portfolios of reinsurance and other liability businesses in run-off. In addition, The Cigna Group announced a transaction to sell its Medicare businesses to Health Care Service Corporation for $3.7 billion, and StanCorp Financial Group signed a deal to acquire The Allstate Corp.’s employer voluntary benefits business for $2 billion.

While insurance underwriting M&A was subdued (and with the industry facing some headwinds heading into 2025 with the California wildfires), M&A within the insurance brokerage and managing general agent (MGA) space remained active and appears poised to remain that way. Arthur J. Gallagher recently announced the largest brokerage transaction in 2024 with its agreement to acquire AssuredPartners for $13.5 billion, which marks a departure from Gallagher’s historical strategy of smaller roll-up acquisitions. AssuredPartners is a case study of the impact that private equity has had on the brokerage industry — AssuredPartners was first formed by GTCR with Jim Henderson in 2011, sold to Apax in 2015, bought by an investor group led by GTCR in 2019, and now is to be sold to Gallagher, all while undertaking multiple acquisitions during this span of time.

In addition to numerous smaller roll-up transactions by both strategics and sponsor-led firms, 2024 also saw Marsh McLennan’s recently announced $7.75 billion deal for McGriff Insurance, and an investor group led by Stone Point Capital and Clayton, Dubilier & Rice acquired the remainder of Truist Insurance at a $15.5 billion valuation after Stone Point had acquired a minority stake in 2023 at a $14.75 billion valuation. Current macro conditions, continued investor interest and the lessening of the antitrust enforcement overhang are likely to help see insurance brokerage deal activity continue at a robust pace in 2025.

E. Cryptoasset Developments

Despite years of adversity, including federal banking regulators’ imposition of an unofficial ban on banks engaging in cryptoasset-related activities and relentless SEC regulation by enforcement, the cryptoasset sector displayed mainstream staying power in 2024. With a new and decidedly pro-crypto administration set to take the reins, tailwinds now abound. The price of a single bitcoin eclipsed $100,000 at the end of 2024, and crypto exchange-traded products, newly approved in 2024, reached $150 billion in assets under management. Leading financial institutions, such as BlackRock, have announced plans to tokenize substantial new funds on public blockchains, and tens of millions of Americans own cryptoassets or investments tied to cryptoassets. And there are at last prospects for regulatory clarity in an arena long clouded by uncertainty. Among other effects, these developments are likely to be a boon for M&A activity within the sector.

As attention turns to crafting a clear, comprehensive crypto legal landscape, it will be important to heed lessons from recent failures while also replacing ill-fitting regulatory rails with transparent, sensible rules of the road. Investor protection and anti-money laundering imperatives remain critical in the traditional finance and crypto arenas alike, but long overdue is a sober reckoning with what distinguishes digital assets as the basis for shaping the healthy evolution of this industry.

F. Key Observations about Preparedness

As we look ahead to what we believe will be an active 2025 M&A market, financial institutions across all sectors should focus on preparedness so that they are well positioned to successfully seize opportunities as they arise. Below we touch on three key functional areas for preparedness: regulatory, compensation and diligence.

1. Regulatory Factors

As the adage goes, “personnel is policy,” and the leadership of the bank and bankadjacent regulators, including the Federal Reserve, OCC, FDIC, CFPB and DOJ, is expected to change in rapid succession under the new administration. We expect all these changes to help catalyze so-called “animal spirits,” which were largely muted during the Biden Administration. Likewise, leadership of the market regulators — the SEC and CFTC — is also changing; the departure of SEC Chair Gensler, who was overtly hostile to the cryptoasset industry, has been particularly lauded by the industry. Although some challenging rhetoric and policies will fall away with the change in agency leadership under the Trump Administration (as well as in Congress), supervisory and regulatory issues will continue to require enhanced attention as the priorities of the new leadership crystalize. Just as important, financial institutions seeking to benefit from more open-minded regulatory stances towards transactions and novel business models should prepare now to seize the opportunity when it arises. After several years of a challenging regulatory environment for bank M&A, the bank regulatory agencies are widely expected to be more receptive to bank mergers that meet the required statutory factors and to reducing the burdens for new entrants.

Among other things, banking organizations should continue to engage on the potential reproposal for Basel III endgame. Vice Chair Barr announced in September 2024 that the banking agencies will repropose the Basel III regulations, after resounding criticism from the sector on the proposed rule. The reproposal decision reflected a new relationship tenor between the bank regulators and the bank sector under the Biden Administration — more aggressive, politicized rulemakings were met with more vocal industry opposition, including an increasing willingness to sue bank regulators. Newly appointed acting Chairman of the FDIC, Travis Hill, has stated he believes any reproposal should be roughly capital neutral and that Barr’s unpublished 2024 reproposal needed work. Barr will step down from his Vice Chair post in February 2025, but a reproposal in some form may nonetheless move forward under the Trump Administration in modified form.

For its part, the FDIC was remarkably active over 2023 and 2024 with a rapid pace of releases, often without the expected interagency process or FDIC Board consensus. Among the more controversial proposed — but not finalized — releases were: the corporate governance guidelines; the proposed rule on parent companies of industrial banks; the roll-backs of the modernization of the brokered-deposit regulations; the proposed rule on incentive-based compensation arrangements; and the proposed rule on requirements for custodial deposit accounts. The FDIC’s many proposals are expected to fall away under new leadership.

The ability of a banking organization’s risk management framework to absorb an M&A target organization will continue to be an important part of bank regulators’ review of proposed transactions. Senior management and boards of directors should challenge their organizations to achieve a high-caliber risk management framework — a first-in-class framework is a key competitive advantage in transaction execution.

2. Compensation and Retention Remain Critical Deal Issues

An essential part of the value and sustainability of any financial services firm is the talent and personal relationships of the firm’s management and employees. In many financial mergers, the primary assets to preserve and acquire are the people, and thus issues surrounding compensation — such as the treatment of equity awards, severance protection and retention arrangements — are often of critical importance to the deal. In particular, the lengthy periods between signing and closing seen in recent transactions have, in certain cases, increased the significance of retention arrangements at both the executive and lower levels. Some transactions, particularly mergers of equals, also serve as an occasion to implement chief executive officer succession planning. Whether the senior management of a target is intended to depart at closing, stay for some transition period or become part of the combined company’s leadership team, a thoughtful and holistic approach needs to be given to the handling and integration of the parties’ existing compensation arrangements, taking into account relevant tax consequences and limitations as more fully discussed in Chapter 2.

Both inside and outside of the transaction context, executive compensation and broadbased incentive compensation matters at financial institutions continue to be sensitive subjects that are scrutinized by the media and shareholders. Due to the influence of proxy advisors and increased regulatory focus and public scrutiny on executive compensation, the design of compensation arrangements in the ordinary course has resulted in a heavier weighting of performance-based compensation with decreased leverage, the disfavored use of stock options in favor of full value awards, longer vesting periods and the implementation of holding period requirements. Simultaneously, “golden parachute” excise tax gross-ups and single-trigger vesting are disfavored and have mostly been eliminated.

In businesses where individuals are the key assets being acquired, transaction parties work to ensure the delivery of those assets with the deal by implementing compensation arrangements that are designed to both incentivize and retain key employees, which historically contained non-competition and other restrictive covenants that sought to limit the employee from leaving for a competitor prior to or after the transaction. While in January 2023, the Federal Trade Commission (the “FTC”) issued a notice of proposed rulemaking that would have dramatically overhauled the law governing non-competition covenants across the United States by prohibiting employers from entering into, and requiring employers to rescind existing, noncompete clauses with employees and consultants, the proposed rule is in jeopardy and unlikely to become final if the agency is under the helm of Andrew Ferguson, President Trump’s pick to replace Chair Lina Khan. However, regardless of the future of the FTC’s proposed ban on noncompetes, acquirers that are relying on the retention of key employees will need to understand the relevant state laws on non-competition restrictions, or run the risk that a generous multi-year retention offer can be shopped by the employee.

The treatment of outstanding equity awards in a transaction is critical since these awards represent a significant portion of an executive or other key employee’s compensation for past services, although the recent market turmoil may have dented the value of historic awards and consequently their effectiveness as a retention tool. Severance and termination protections also reduce unwanted defections by addressing executive uncertainty through providing key individuals with greater security against the risk of an involuntary termination (without “cause” or due to a “constructive discharge”) associated with combining two companies, as cost savings and synergies are often meaningful considerations when evaluating the benefits of a transaction and it is inevitable that there will be some executive and employee terminations. Relatedly, well-designed retention programs can mitigate the disruptive potential of a deal on needed personnel as an additional and discrete financial incentive to remain focused on the company’s best interests and mitigate personal uncertainty; a holistic design incorporating both “upside” incentives (retention awards) and “downside” protections (severance benefits and vesting) is often the most effective approach.

When carefully structured, taking into account tax considerations, deal-related compensation programs can play a critical role in guaranteeing the successful completion and integration of the transaction and the future stability and strength of the combined company.

3. The Increasing Importance of Technology Due Diligence

While due diligence has always been a crucial component of executing successful acquisitions, the technology sphere has grown ever more important over time. As technology aspects of operations come to predominate elements of commercial value in deals — whether in the form of intellectual property rights (including rights to ownership and use of data) or supporting infrastructure — as well as a key source of potential risk — both from a compliance or operational perspective — sophisticated deal makers today begin looking early for signs of concern that could ultimately undermine the strategic success of a transaction.

Pillars of a detailed technology diligence process include an assessment of asset quality, development of an integration plan, cataloging of the legal risks and evaluation of cybersecurity attributes. A thorough asset quality review will need to be tailored to the specifics of the transaction but can reasonably be expected to include validating the quality of proprietary software (which may include third-party audits of codebase with a view to identifying not only technical quality but also open-source content and license compliance issues). Similarly, the IT infrastructure design, efficiency and scalability can impact asset value and the ability to generate incremental value accretion in the future from the acquired assets. Investigating these areas can reveal the extent of “technical debt” that may be present, including as a result of older components (both code and physical equipment) still being relied upon. It can also reveal areas where integration activities may face challenges, or worse yet where assets are incompatible with the buyer’s systems or lack the flexibility to be used to advance the strategic goals of the transaction from the buyer’s perspective. Legal risks can be buried in the technology stack through failure to have appropriate ownership or use rights over source code or data, infringement of patents or trademarks, failure to house sensitive customer data in a compliant manner, or systems whose design fails to operate in compliance with underlying legal frameworks. In the most extreme case, it is possible that complex systems are fraudulently populated with fake data. As if these areas did not present a sufficient challenge, a final key element is the cybersecurity profile of the target’s technology systems. The increasing frequency and sophistication of cyber threats means not only may there be latent security breaches that have already occurred, but inherited systems with vulnerabilities present the risk that postclosing breaches may occur before the buyer has had the opportunity to bring acquired systems up to the buyer’s security standards (and integration itself can present a risk while parallel systems must be maintained and monitored). These security risks can be particularly acute in cash-strapped companies and companies that have accumulated (but not necessarily assimilated) numerous disparate systems through historic acquisitions of their own.

For financial institutions in particular, regulatory expectations with respect to the attendant risks of technology systems continue to become more exacting. These include understanding the risk management implications of the acquisition, which requires thoughtful advance planning and a nuanced understanding of the acquired technology assets and infrastructure, as well as direct legal compliance obligations. Experienced acquirers have in recent years continued to — and will need to continue to — enhance the rigor of their technology diligence investigations.

A link to the full memo can be found here.