Toronto-Dominion Bank TD-T is acquiring New York investment bank Cowen Inc. for US$1.3 billion, accelerating a decade-long plan to turn TD’s capital markets division into a cross-border competitor and doubling down on its US expansion plan. which has been launched.
Cowen is an independent dealer with 1,700 employees that specializes in U.S. stocks, an area where TD has been notably weak in the United States. TD will pay US$39 per Cowen share in cash, and after adding Cowen’s US$2 billion in annual revenue, TD Securities will have total revenue of about US$6.8 billion, with more than 40 % from USA.
Cowen’s deal adds to an already ambitious bid TD has made to expand its large retail banking network in the eastern U.S. In February, TD agreed to buy First Horizon Corp. for $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 CEO Bharat Masrani. But the bank has spent nearly $19 billion in less than six months to boost its US strategy, following 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 and opportunism.
Over the past decade, TD has built its US capital markets strategy more or less from scratch to generate US$1.1 billion in annual revenue, focusing on strengths in fixed income services, foreign exchange and treasury. 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 behind other banks in key areas. The acquisition of Cowen closes key gaps, giving TD the capabilities it lacked in the US in capital markets, sales and equity trading, as well as research.
It also strengthens TD’s US business in M&A advisory, leveraged finance and prime services, and adds a research team with 60 editorial analysts and expertise in areas such as environmental, social and governance issues.
TD Securities CEO 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 conference call call tuesday
“This came out as a ready-made, plug-and-play, ready-to-go platform,” he added in an interview.
After Mr. Ahmed took the helm of TD Securities last year after a stint as TD’s chief financial officer, toured with colleagues and clients and soon concluded it made sense to accelerate the growth rate of the northern branch – American dealer. Mr. Ahmed and Robbie Pryde, TD’s head of corporate and investment banking, first approached Cowen earlier this year.
TD spent most of the excess capital it had accumulated during the COVID-19 pandemic to buy First Horizon, but it had a source of financial firepower in reserve. To finance the Cowen deal, TD raised $1.9 billion by selling 28.4 million shares of Charles Schwab Corp., reducing a stake TD acquired in 2020 when it previously sold its TD Ameritrade Holding Corp. shares. to its discount brokerage rival. At the time, those Schwab shares were worth $37, and TD sold them this week for about $69 each.
“This was really a good opportunity to monetize some earnings and get some financing for this transaction,” said Mr. Ahmed.
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 context current market,” Gabriel Dechaine, an analyst at National Bank Financial Inc., said in a note to clients.
The stock sale reduces TD’s stake in Charles Schwab from 13.4% to 12%, and Mr. Masrani said the bank has no current plans to sell more shares. But the discount brokerage industry, where Schwab is a leader, faces upheaval as new online competitors undercut retail prices. Now that TD has shown it’s willing to redirect capital from its Schwab stake, analysts speculate the door is open for TD to repeat the maneuver.
“They dipped into the piggy bank for this transaction, and I think they could dip into it again in two years if something else comes up,” said Ebrahim Poonawala, an analyst at Bank of America Securities Inc., in an interview. . “I think it’s definitely on the table.”
TD’s approach also came at an opportune time for Cowen. The investment bank was looking for ways to fund its continued expansion, driven in part by a focus on clients in growing sectors such as healthcare, biotech and cannabis, some of which have been hit by the recent market downturn.
“This is the first time … where we feel constrained by the size of our balance sheet,” Jeffrey Solomon, Cowen’s chairman and chief executive, said on Tuesday’s conference call. “When Riaz and team approached our team with this idea, it just made logical sense.”
After closing, Mr. Solomon will join TD Securities and report to Mr. Ahmed along with Cowen co-chairs Dan Charney and Larry Wieseneck. Parts of the combined business will be known as TD Cowen.
TD’s share price has been hit by investor concerns about potential regulatory risks related to the First Horizon deal, which has yet to close, according to banking analysts. But Masrani said he is confident the bank can juggle the two deals and push ahead with parallel integration plans.
“They’re different businesses,” he said. “We put a lot of thought and a lot of work into making sure there was no impact … in terms of the First Horizon transaction.”
To merge Cowen with TD Securities and retain Cowen employees, TD will spend $450 million, of which $200 million will go toward providing key incentives for staff to stay. The integration process remains “a primary risk” to the Cowen deal, Mr. Dechaine, as mergers are “notoriously difficult when they involve investment banking operations with different cultures.”
TD anticipates an increase in revenue of $300 million to $350 million over three years from the combined dealer, and expects a modest increase in profits in 2023. The deal is expected to close in early 2023, subject to upon approval by Cowen shareholders and regulators.
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