TD Bank's acquisition of investment dealer Cowen Inc. in early August needs to mark the start of what promises to be an expensive expansion on Wall Street.Fred Lum/The Globe and Mail
For Toronto-Dominion Bank TD-T to succeed on Wall Street where many others have failed, its US$1.3-billion acquisition of investment dealer Cowen Inc. in early August needs to mark the start of what promises to be an expensive expansion, not the end of a spending spree.
TD Securities, the investment dealer arm of Canada’s second-largest bank, picked up significant heft in U.S. capital markets by snapping up New York-based Cowen. Combined, the two platforms are better equipped to compete for corporate clients on both sides of the border when they go up against domestic rivals Royal Bank of Canada RY-T and Bank of Montreal BMO-T, both of which previously acquired U.S. dealers, and Wall Street banks.
While TD Securities already had teams in New York, Boston, Chicago and Houston, adding Cowen’s 1,700 employees transforms the Canadian unit from a regional to a North American investment bank, with more than 6,500 staff. (We now wait for a competitive response from the remaining major domestic players: Bank of Nova Scotia BNS-T, Canadian Imperial Bank of Commerce CM-T and National Bank of Canada NA-T.)
Outsiders took an upbeat view of the Cowen acquisition, with caveats. “We see and understand the long-term strategic value of making this acquisition as it would further build out TD’s wholesale business rather quickly,” said analyst Darko Mihelic at RBC Capital Markets.
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The caveat is TD needs to keep spending. The Canadian bank must pay up to ensure Cowen’s best people stick around. And it needs to keep hiring U.S. investment bankers, to build expertise in key sectors where Cowen has little presence.
“The track record of successful cross-border capital markets acquisitions is small, with retention of people being the key obstacle over the medium to long term,” said analyst Meny Grauman at Scotiabank. TD projects it will spend US$450-million on integrating Cowen over the next three years, including roughly US$200-million on retention pay. Mr. Grauman said this “is a big number relative to the purchase price.”
The big number reflects the big compensation paid to Wall Street’s top bankers. Cowen’s chief executive, Jeffrey Solomon, made US$28.6-million last year, including a US$16-million cash bonus. That’s more than four times what TD paid its Toronto-based head of investment banking and almost three times the size of CEO Bharat Masrani’s paycheque. Mr. Solomon is sticking around to continue running the U.S. dealer and will join the parent bank’s executive team.
TD Securities needs Cowen dealmakers to stick around in sectors that dovetail with existing teams at the Canadian dealer, such as telecom, tech and consumer-facing companies. If the combined firms can offer deeper expertise, they will win more business from corporate clients on both sides of the border.
If TD Securities is serious about winning big on Wall Street, it will also need to keep adding talent in sectors where the ability to lend money is critical to winning mandates, including oil and gas, real estate, mining and utilities. The Canadian dealer has a strong domestic franchise in all these sectors, in part owing to the parent bank’s balance sheet: TD Bank is one of the North America’s largest corporate lenders.
Cowen, on the other hand, has a relatively small presence in credit markets and is a secondary player in sectors such as resources or real estate, where lending is a key to winning business. TD would be well advised to follow the game plan at Royal Bank and Bank of Montreal, which both continued to recruit aggressively on Wall Street after buying small dealers. In recent years, the Canadians poached U.S. talent from European banks that were retrenching.
Wall Street can be a graveyard for foreign banks’ growth ambitions. CIBC, for example, dropped US$525-million on investment dealer Oppenheimer & Co. in 1997. The Canadian bank was never able to scale up the business and earn acceptable returns, and sold it at a loss a decade later. Swiss, French, Japanese, British and German banks have suffered similar fates.
To avoid being yet another bank that can’t make it big in the Big Apple, TD needs to keeping spending in order to retain talent and build out its presence on Wall Street.
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Andrew Willis