Bharat Masrani has overseen three successful U.S. bank acquisitions over a four-decade career at Toronto-Dominion Bank TD-T.
On Monday, he rolled out a new game plan as he announced the largest deal TD has ever staged: the US$13.4-billion takeover of Memphis-based First Horizon Corp FHN-N.
The terms of the deal suggest TD’s chief executive has acknowledged that what worked in the past doesn’t fly today, with Democrat Joe Biden in the White House and 7,900 First Horizon employees facing the uncertainty of a takeover on top of their existing, pandemic-driven workplace anxieties.
TD structured this offer to reflect two risks the Canadian bank hasn’t encountered in past deals: heightened regulatory scrutiny under Mr. Biden, and soaring staff turnover.
Back in July, Mr. Biden signed an executive order designed to increase economic competition, a policy shift that explicitly discouraged bank takeovers. That announcement came just a year after First Horizon sealed a merger with regional rival Iberiabank Corp.
Leading Democrats continue to beat the drum for increased competition in every sector, including financial services. Shortly after TD announced its deal on Monday, U.S. Senator Elizabeth Warren – who oversees banks – hit Twitter with this nugget: “The only way that we break up the power of giant corporations to price gouge is by enforcing our antitrust laws and creating competition.”
That’s not exactly an endorsement of Mr. Masrani’s plan to build one of North America’s largest banks by adding 412 First Horizon branches and 1.1 million customers to TD’s existing network in the Southeastern United States.
TD buying U.S.-based bank First Horizon for US$13.4-billion
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So on Monday, Mr. Masrani kicked off a campaign to win approval for the deal – from both regulators and First Horizon shareholders – by offering a number of sweeteners.
First off, TD committed to keeping all of First Horizon’s branches. (Closing outlets is a common cost-cutting approach in most bank mergers.) TD also invested US$494-million on Monday in First Horizon preferred shares, with the U.S. bank promising US$150-million of this cash will be spent on employee retention bonuses targeted at branch staff, IT teams and its executives.
The prospect of getting a bonus to stick around should dissuade First Horizon employees, who just went through a major merger, from joining the great resignation. It will also win points with federal regulators.
“The lack of branch closures and management’s commitment to retaining customer facing talent is partly a reflection of the new regulatory regime when it comes to deal making in the U.S.” analyst Ebrahim Poonawala at Bank of America Securities said in a report on Monday.
“The regulators likely want to minimize the impact on local communities from deal making and limit the risk of branch closures in rural communities or markets that are underserved by banks,” he added.
In a break with past takeovers, TD also offered to increase its bid if the deal is delayed. Mr. Masrani said the US$25-per-share offer is expected to close in the last few months of this year.
However, if the takeover hasn’t been completed by Nov. 27, TD will raise the price by US$0.65 a share over the course of the next year, or about a nickel each month. Unless the two banks agree to extend the offer, the deal will be terminated on Feb. 27, 2023. Mr. Poonawala said the prospect of a boosted bid “reflects sensitivity on the part of First Horizon to the delays that we are seeing with the regulatory approval process.”
Analysts predict TD will end up bumping its bid. In a report, John Aiken at Barclays said: “We believe that its forecast for closing in the current U.S. regulatory environment is aggressive and investors will likely see the US$0.65 per share added on to the final price.”
If TD has to sweeten the pot, the CEO will do so gladly. The bank hasn’t made a major U.S. acquisition in more than a decade, despite continually scouting for targets. In a conference call on Monday, Mr. Masrani said this deal is “precisely the kind of transaction that we’ve been looking for, and that we’ve executed so successfully in the past.”
Landlocked in their home market, where the federal government has shut the door on mergers, Canada’s banks all look to the U.S. for growth. TD’s move on First Horizon follows on Bank of Montreal’s $20.9-billion bid for California-based Bank of the West in December, a transaction that also requires regulatory approval, and that came with promises to keep branch networks intact. CEOs at CIBC and Royal Bank, both flush with cash, have also said they are looking at acquisitions south of the border.
If TD gets a deal done by committing to branch networks, paying retention bonuses and offering extra cash to compensate for delays, rivals will soon be rolling out the same game plan.
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Andrew Willis