Toronto-Dominion Bank TD-T is acquiring New York-based investment bank Cowen Inc. for US$1.3-billion, speeding up a decade-long plan to make TD’s capital markets division a cross-border competitor and doubling down on a U.S. expansion plan that has kicked into high gear.
Cowen is an independent dealer with 1,700 staff that specializes in U.S. equities, an area where TD has been notably weak in the United States. TD will pay US$39 a share of Cowen stock in cash, and after adding Cowen’s $2-billion in annual revenue, TD Securities will have global revenue of about $6.8-billion, with more than 40 per cent coming from the U.S.
The deal for Cowen adds to an already ambitious bid TD has made to extend its large retail banking network in the eastern U.S. In February, TD agreed to buy First Horizon Corp. for US$13.4-billion in the largest acquisition the Canadian bank has ever made. As recently as this year, TD attracted criticism for being too conservative under chief executive Bharat Masrani. But the bank has spent nearly $19-billion in less than six months to turbocharge its U.S. strategy, after an overhaul of its top executive team last year.
This latest deal to buy Cowen is a product of that wave of change, with elements of long-term strategy as well as opportunism.
Over the past decade, TD has built its U.S. capital markets strategy more or less from scratch to bring in US$1.1-billion in annual revenue, focusing on strengths in fixed income, foreign exchange and treasury services. But TD’s global wholesale business still earns less than half the revenue of its rival unit at Royal Bank of Canada, in part because it lags other banks in important areas. Acquiring Cowen closes key gaps, giving TD capabilities it lacked in the U.S. in equity capital markets, equity sales and trading, as well as research.
It also bolsters TD’s U.S. business in advising on mergers and acquisitions, leveraged finance and prime services, and brings in a research team with 60 publishing analysts and expertise in areas such as environmental, social and governance issues.
TD Securities chief executive Riaz Ahmed told analysts he expects the deal to accelerate TD’s plan for its U.S. wholesale banking business “easily by five if not 10 years,” on a Tuesday conference call.
“This just kind of came along as a platform ready made, plug-and-play, ready to go,” he added in an interview.
After Mr. Ahmed took the helm at TD Securities last year after a stint as TD’s chief financial officer, he made the rounds with colleagues and clients and soon concluded it made sense to speed up the rate of growth of the dealer’s U.S. arm. Mr. Ahmed and Robbie Pryde, TD’s head of corporate and investment banking, first approached Cowen early this year.
TD spent most of the excess capital it had accumulated during the COVID-19 pandemic to buy First Horizon, but had a source of financial firepower in reserve. To fund the Cowen deal, TD raised US$1.9-billion by selling 28.4 million shares in the Charles Schwab Corp., reducing a stake in TD acquired in 2020 when it previously sold its shares in TD Ameritrade Holding Corp. to its discount brokerage rival. At the time, those shares in Schwab were worth US$37, and TD sold them this week for about US$69 each.
“This was really kind of a nice opportunity to monetize some gains and to get some funding for this transaction,” Mr. Ahmed said.
The price TD is paying for Cowen – 1.7 times Cowen’s tangible book value as of March 31, and 8.1 times Cowen’s estimated 2023 earnings of US$156-million – is “attractive, a reflection of the current market backdrop,” said Gabriel Dechaine, an analyst at National Bank Financial Inc., in a note to clients.
The share sale reduces TD’s stake in Charles Schwab from 13.4 per cent to 12 per cent, and Mr. Masrani said the bank has no current plans to sell more stock. But the discount brokerage industry where Schwab is a leader faces upheaval as new, online competitors drive down prices for retail trading. Now that TD has shown it is willing to redirect capital from its stake in Schwab, analysts are speculating the door is open for TD to repeat the manoeuvre.
“They dipped into the piggy bank for this transaction, and I think they could very well dip into it again two years from now if something else comes up,” said Ebrahim Poonawala, an analyst at Bank of America Securities Inc., in an interview. “I think that’s definitely on the table.”
TD’s approach also came at an opportune moment for Cowen. The investment bank was looking for ways to fund its continued expansion, which was driven partly by focusing on clients in surging sectors such as health care, biotech and cannabis, some of which have suffered in the recent market downturn.
“This is the first time ... where we’ve felt constrained by the size of our balance sheet,” said Jeffrey Solomon, Cowen’s chair and chief executive, on Tuesday’s conference call. “When Riaz and team approached our team with this idea, it made logical sense.”
After closing, Mr. Solomon will join TD Securities and report to Mr. Ahmed along with Cowen co-presidents Dan Charney and Larry Wieseneck. Parts of the combined business will be known as TD Cowen.
TD’s share price has been weighed down by investors’ concerns about potential regulatory risks relating to the First Horizon deal, which hasn’t closed yet, according to banking analysts. But Mr. Masrani said he is confident the bank can juggle both deals and pull off parallel integration plans.
“These are different businesses,” he said. “We thought very hard and did a lot of work to make sure there is no impact ... with respect to the First Horizon transaction.”
To merge Cowen with TD Securities and retain Cowen employees, TD will spend US$450-million, of which US$200-million is earmarked to give key staff incentives to stay. The integration process remains “a primary risk” for the Cowen deal, Mr. Dechaine said, as mergers are “notoriously difficult when involving investment banking operations with different cultures.”
TD projects a revenue boost of US$300-million to US$350-million within three years from the combined dealer, and expects a modest boost to profits in 2023. The deal is expected to close early in 2023, subject to approvals from Cowen shareholders and regulators.
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