See Table of Contents for Tiburon's FSI Mergers & Acquisitions Research Report Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, is pleased to announce the release of its new research report on FSI Mergers & Acquisitions. This research release summarizes some of the report's key findings. The purpose of this report is to provide readers with an initial understanding of the rapid consolidation taking place in the banking, brokerage, insurance, & asset management industries. Over recent decades, Glass Steagall has fallen and the financial services industry has picked up its mergers & acquisitions trend. Banks have acquired other banks, brokerage firms, & asset managers. Insurance companies have acquired other insurance companies, independent broker/dealers, & asset managers. Full-service brokerage firms have acquired other full-service brokerage firms and asset managers. And asset managers have acquired one another. With all this activity, what is left? Lots! This report profiles the enormous number of transactions that have taken place and lays the groundwork for the expected consolidation over the coming decade. The acquisition market continues to evolve and data still seems to be analyzed in silos. As a result, Tiburon’s primary objective of this report was to bring a common set of facts to all market participants. This is the third draft of Tiburon’s research on this topic. Tiburon’s first draft of this report was published in 2005; that draft consolidated prior Tiburon research into one report and outlined the framework for gathering more data. Tiburon’s second draft of this report was published in 2008; that draft coordinated the prior findings of this report with Tiburon’s banking, brokerage, and insurance industry reports. This is Tiburon’s third draft of this report. Key Findings This report has a long list of interesting facts to share: Market History Almost half of retail banks failed in the 1929 stock market collapse Chase Manhattan Bank was formed by the merger of the Bank of the Manhattan Company & Chase National Bank of the City of New York in 1955 The Charles Schwab Corporation Management team acquired the firm back from Bank of America in 1987 when Bank of America ran into trouble The Big Eight CPA firms consolidated to become the Big Four between 1989 and 2002 The Federal Reserve Bank increased the shares banks could earn from underwriting to 25% in 1996 Citicorp and Travelers merged in 1998 to form Citigroup, requiring a change in Glass Steagall or a major restructuring The Gramm Leach Bliley Act was passed in 1999, repealing the Glass Steagall Act, and removing boundaries between banking, securities, & insurance by allowing all to be conducted by single companies Bank of America acquired Fleet Boston in 2003 for $47 billion Wachovia acquired AG Edwards in 2007, making it the third largest brokerage firm Market Definition There have been 15,000 financial services industry mergers & acquisitions and another 6,000 related mergers & acquisitions for a total of 21,000 cumulative industry transactions Market Growth There are almost 9,500 cumulative mergers & acquisitions each year, an increase almost 50% since 2003 There are nearly 1,000 financial service industry mergers & acquisitions, up 400% since 1985 to 1989 Financial services industry cumulative mergers & acquisitions account for only 10% of all mergers & acquisitions Financial services industry cumulative mergers & acquisitions valuations are $1.1 trillion, up almost 300% since 2003 but down 10% since 2006 Financial services industry mergers & acquisitions valuations are $134 billion, relatively stagnant since 2003 but off 50% since 2006 Financial services industry merger & acquisition valuations account for 10% of all mergers & acquisitions valuations, down from 27% in 2003 Financial services mergers & acquisitions average $135 million valuations, up 10% since 2001 but down 50% since 2006 Leading Financial Services Company Acquirers The Bank of New York Mellon Corporation and Wachovia Corporation have been the most prolific acquirers, each acquiring over 35 other firms However, Citigroup leads in acquisition valuation, having spent over $200 billion, with Bank of America Corporation trailing $100 billion behind Market Segmentation Retail banks & insurance companies have acquired over 40 securities firms, 40 of the top 50 independent broker/dealers, and numerous asset management companies Retail Banks Retail bank consolidation during the 1990s significantly reduced the number of retail banks to 7,426 Interestingly, many countries still have only 6 or 8 retail banks Retail bank acquisitions of other retail banks peaked in 1998, declining in 1999 to 2002, and have been rising again since to 425 in 2007 The valuation of retail bank acquisitions increased to its high of $180 billion in 2004, but decreased to $61 billion in 2007 Over three-quarters of retail banks will achieve cost savings in their acquisition of other retail banks Less than two-thirds of retail bank employees understood the vision & mission of the newly integrated retail banks There have been some large brokerage firm deals, including Bankers Trust acquisition of Alex Brown and Chase Manhattan’s acquisition of Hambrecht & Quist Retail banks spent more than $40 billion acquiring investment banks Retail bank acquisitions of asset managers have been stagnant around 20 deals, with a high in 2002 at 25 The valuations of retail banks acquisitions of asset managers has also been random, with 2006 hitting its high at over $2.0 billion and then dropping to $265 million in 2007 Full-Service Brokerage Firms Full-service brokerage firms acquisitions of asset managers have declined to 7, down 50% since 2000 Insurance Companies There are 1,123 life insurance companies, down 50% since 1994. Specifically, the number of life insurance companies has decreased from 2,136 in 1994 to 1,123 in 2003 There are 330 insurance company acquisitions of other insurance companies, up 40% since 1990 but down from the 1996 peak The value of insurance company acquisition has stagnated near $20 billion, after hitting a high in 1998 at $165 billion The average valuation of insurance companies acquisitions has been declining since 2001 to $68 million The number of life insurance company acquisitions has risen to 51 per year, up 500% from 11 to 14 in 1985 to 1994 The value of life insurance company acquisitions has increased to over $30 billion per year, up 3,000% since 1985 and 300% since 1995 to 1997 Over one-third of insurance companies have completed or given serious consideration to purchasing other insurance companies in the last 12 months The numbers of insurance companies acquiring asset managers have been relatively low, at just 3 to 14 each year The valuation of insurance company acquisitions of asset managers dropped to $153 billion from its high in 2004 and 2005 at $1.7 billion The average valuation of insurance company acquisitions of asset managers has dropped to $19 million from its high in 2005 at $425 million Asset Managers There are 141 asset manager acquisitions of other asset managers, up 700% since 1992 and above the prior peak of 98 in 1995 There are 28 asset managers acquisitions of institutional asset managers, down almost 50% since 1995 There are 28 asset manager acquisitions of mutual fund companies, down 33% since 1996 but up 80% since 1990 Asset manager asset multiples have been ranging between 2.1% and 2.5% in recent years Mutual fund price-to-assets under management valuations are the highest compared to private client and institutional asset managers Almost all asset managers feel that legal and regulatory issues are their biggest business challenge One-to-three TAMPs have been acquired each year since the late1990s Advisor Port was the largest TAMP acquisition with $13 billion assets under management& administration Asset Mark commanded the highest price amongst TAMP acquisitions at $270 million, almost double the next largest deal, which was Lockwood Foreign Financial Institutions European mergers & acquisitions have been steadily declining to 463 But the value of European merger & acquisitions has increased substantially to $134 billion The aggregate valuation of foreign financial institutions acquisition of retail banks is $8.3 billion, up 20% since 2001 The number of foreign financial institutions acquiring insurance companies increased to 26 in 2007 from 19 in 2006 Foreign financial institutions acquisitions of insurance companies average valuations dropped to $391 million in 2007 from its high in 2003 at $640 million The number of foreign financial institutions acquiring asset managers firms increased 60% since 2006 to 23 deals Foreign financial institutions acquisition valuations of asset managers jumped to its high of $9.4 billion in 2007, after four stagnant years Increase in Mergers & Acquisitions Activity The number of mergers & acquisitions will increase to 9,750 by 2013 Mergers & acquisitions valuations will decrease to $1,050 billion as larger firms take advantage of purchasing smaller firms at a discount Increase in Both Consolidations & Diversification Activity Cross industry diversification will likely continue; the collapse of Glass Steagall will only increase this trend Many retail banks and insurance companies will likely try to turn themselves into financial supermarkets through acquisitions; these institutions will sell everything from checking accounts to mutual funds, life insurance, mortgages, foreign exchange, and auto loans The Emergence of the Retail Banks, Insurance Companies, & Foreign Financial Institutions Acquirer Models Retail banks will likely see growth in both the number of large and small banks By 2013, the number of the largest banks may increase to 95 while the number of the smallest banks may decrease to 1,483 Over one-half of investors believe that one or two of the twenty largest retail banks would be acquired by 2005 Over one-third of asset managers expected to do acquisitions in the next three years Deciding Factors in Acquisitions The ultimate winners will have high market caps (large companies) and high price-to-earnings ratios (strong valuations) Financial services companies can address the market’s skepticism about transactions and effectively realize the full potential of mergers if they follow four critical steps, including indentifying clear leadership and setting high savings & revenue goals To better understand the developments for FSI Mergers & Acquisitions, executives can purchase Tiburon's An Initial Overview of Financial Services Industry Mergers & Acquisitions: Consolidation of the Banking, Brokerage, Insurance, & Asset Management Industries research report where the key findings highlighted above are covered in greater detail. Please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.