(Toronto) TD Bank is accelerating the international growth of its investment banking business with an agreement to acquire New York-based Cowen for US$1.3 billion in cash.
Updated yesterday at 4:04 p.m.
The bank said on Tuesday that the deal would strengthen its investment division, TD Securities, by expanding the capabilities of its global sales, trading and execution platforms, as well as increasing its research coverage.
“This is an opportunity that doesn’t come along every day, and we felt it was critical to our growth aspirations,” TD Bank Chief Executive Bharat Masrani said during a conference call with analysts regarding the deal.
“You have often heard us talk about our aspiration to build an integrated North American franchise with global reach. […] and frankly, it pre-empts our aspirations by many, many years. »
TD Securities chief executive Riaz Ahmed said the deal brings a more mature U.S. equity and financial markets brokerage business that can offer a wider range of services to clients and deepen research. on policies and sustainability.
“Our customers regularly tell us that, given their confidence in TD and the value we add, they would like TD Securities to support them across a broader range of products and markets. This transaction allows us to do just that. »
The deal will increase TD Securities’ revenues by more than a third and bring 1,700 employees from Cowen to the bank, where parts of the combination will operate under the banner of TD Cowen, a division of TD Securities.
This division will be led by Cowen President and CEO Jeffrey Solomon, who mentioned on the conference call that his grandmother was from Saskatchewan and that he got along well with Mr. Masrani and other TD executives since approaching Cowen earlier this year.
“These transactions are much more people-related than most investors realize, I think. We couldn’t do this if we didn’t feel very attached to the interpersonal relationships we’ve established over the past few months. »
Retention, a key aspect
To help retain key employees, TD expects to spend about $200 million on retention costs over the next three years, as part of the $450 million total cost of integrating the business.
Retaining top talent will be a key challenge for the deal, Scotiabank analyst Meny Grauman said in a note calling the deal “negative”.
“The track record of successful acquisitions in cross-border capital markets is weak, with staff retention being the main obstacle in the medium to long term. »
To provide capital for the transaction, TD said it sold 28.4 million non-voting common shares of The Charles Schwab Corporation for proceeds of approximately $1.9 billion. In Mr. Grauman’s view, this transaction effectively trades some exposure to US wealth management for exposure to US financial markets.
“The diversification inherent in this trade is not necessarily a bad thing, although we note that the market generally prefers wealth to capital markets. »
TD’s stretched buy price represents a valuation multiple of 8.1 times Cowen’s 2023 earnings forecast, which National Bank analyst Gabriel Dechaine says is attractive and reflects the backdrop current market.
The transaction increases TD’s stake in Schwab from 13.4% to 12%, but the bank clarified that it had not changed its strategy on Schwab and had no intention of selling more shares . TD Bank, which sold Schwab’s shares for US$69 each, acquired the shares when Schwab acquired TD Ameritrade in 2020, and those shares then traded at US$37.
The deal comes as TD is still working to close its $13.4 billion acquisition of Memphis-based First Horizon, but the Cowen deal is neutral on the bank’s capital needs through the deal with Schwab, and there should be no problem managing the two integrations, Masrani explained.
“We thought a lot and worked a lot to make sure there would be no impact on TD Bank […] with respect to the transaction with First Horizon. They are completely different businesses. »
TD expects to realize revenue synergies of US$300 million to US$350 million by the third year after the deal closes.
The transaction, which has been approved by the Boards of Directors of TD Bank and Cowen, is expected to close in the first quarter of calendar year 2023 and is subject to customary closing conditions.