M&A activism in the financials sector has increased since the COVID-19 pandemic hit and the trend is unlikely to abate anytime soon on either side of the Atlantic.

What is the trend?

According to Activist Insight Online, 23 companies in the financial services segment, which includes banks and insurance companies, were subjected to M&A activist demands in 2020, the highest since 2015. So far this year, 10 companies have been publicly targeted with M&A demands, matching the record set in the first four months of 2016.

This has taken place against a backdrop of increased activism in the financial sector generally, although most of it has been far from eye-grabbing. One hundred and ten companies were targeted in 2020, versus 105 in 2019 and 110 in 2018. So far this year, 55 financials companies were targeted, versus 62 during the same period in 2020.

Activist Insight Online recorded 17 companies in financial services sector that saw demands in favor of M&A in 2020, the highest since at least 2013, when counting started. The number of companies targeted with oppose M&A demands was also elevated at six, lower than the record of 10 reached in 2015 but higher than 2017 and 2018.

In 2021, the four companies targeted with oppose M&A demands equals those pushed to undertake M&A.

Who is making it happen?

Veteran banking sector activist Stilwell Value is pushing Peoples Financial to sell itself or improve performance by increasing shareholder payouts. Stilwell stepped up its activity this and last year, after a period of quiet. The activist subjected three banks to demands since the start of 2020, compared to zero in 2019.

Driver Management pushed both Community Bankers Trust and First United to sell themselves, but a prolonged court fight with First United took the activist’s attention away from other potential campaigns. One of Driver’s largest holdings, American River Bankshares, recently sold itself to Marin Bancorp, founder Abbott Cooper has told Activist Insight Online.

Misha Zaitzeff and Vik Ghei’s Holdco Asset Management is opposing the acquisition of Boston Private Financial by SVB Financial, saying the terms could be improved.

Over in Europe, Petrus Advisers has been especially active. The activist succeeded in getting a higher price for its shares in Credito Valtellinese, and is now hoping to see Czech Republic-based Moneta Money Bank selling itself for a higher offer. Meanwhile, Petrus is pushing Germany-based Aareal Bank to spin off its software unit. It is also seeking board seats at both Aareal and Moneta.

Why is it happening?

“Some of the headwinds that the sector had felt are starting to wear down,” Petrus partner Till Hufnagel said in an interview with Activist Insight Online, adding certain management teams have repositioned banks to cope with the difficult environment while working towards sustainable levels of profitability.

Furthermore, the COVID-19 pandemic and the ensuing low interest rate environment has hit valuations in the banking sector. Combined with a “lenient” regulatory regime in Europe, this has prompted larger banks to go out shopping, according to Hufnagel.

“People are trying to buy banks on the cheap, that trade dramatically below book value with lots of excess capital,” Hufnagel said. In Europe, activists have mostly opposed deals, demanding higher compensation for their shares.

Increased M&A activity has been spotted in the U.S. as well. “There has been a massive amount of M&A that has happened over the last 4-5 months, and that is expected to continue,” Driver founder Abbott Cooper said in an interview with Activist Insight Online. Some of these deals are being pushed by activists, but others are opposed.

How sustainable is the trend?

The trend is expected to continue. Index provider FTSE Russell is expected to reconstitute its indexes in June this year and many small community banks might be thrown out of the Russell 2000 Index. According to a report by Keefe, Bruyette & Woods (KBW), the cutoff market capitalization for new member inclusion this year is $242 million, up from $95 million in 2020 and the highest since 2007. The most affected sector will be community banks, with KBW expecting 77 banks to be excluded from the index.

As passive index funds are forced to sell, volumes will spike dramatically, creating opportunities for activists to build large stakes quickly. Cooper, who has amassed some dry powder, is one of them. “There is going to be a tremendous amount of M&A in the next 12 to 18 months,” Cooper said. “So there is good opportunity to push for consolidation.”