TD buys Cowen for US$1.3 billion in US investment banking deal

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The Toronto-Dominion Bank announced on Tuesday morning that it had agreed to buy Cowen Inc. in its latest U.S. takeover – and some analysts have warned that TD may struggle to retain the most talented valuable from Cowen.

Under the terms of the deal, TD will pay US$1.3 billion, or US$39 per share, in cash to buy the New York-based investment bank. TD said it sold 28.4 million shares of The Charles Schwab Corp. to finance the transaction; therefore, TD said the transaction would be neutral to its Common Equity Tier 1 capital ratio.

“Cowen is a leading independent broker with a leading U.S. equity business and a strong, diversified investment bank which, combined with TD Securities, will enable us to accelerate our strategic plans for growth in the U.S. said TD Chairman and CEO Bharat Masrani in A Release.

The deal was a source of speculation for weeks, after Bloomberg News reported in early July that talks were underway.

Paul Harris, partner and portfolio manager at Harris Douglas Asset Management in Toronto, said the scale of TD’s investment banking ambitions in the United States will go a long way towards the success of the Cowen deal.

“Is this really a deal to help their existing customer base grow and help them with investment banking, corporate finance, etc.? Is that the goal? Or is the goal to say that we want to be a big investment bank in the United States? And I think if that’s the case, I think it’s going to be very difficult. … And so if you’re going to compete with Goldman (Sachs), I think it would be a very bad thing, or with Morgan Stanley or JP Morgan.

Harris, whose company owns shares in TD, added that the deal with Cowen would likely “look terrible” in a few years if TD intended to try to compete with these Wall Street giants.

TD said the purchase of Cowen would “modestly” boost its adjusted earnings per share for fiscal 2023, and it expects up to US$450 million in integration and retention costs before taxes over a three-year period. The transaction, which TD said is expected to close in the first quarter of next year, is subject to regulatory approvals in Canada and the United States, as well as a vote by Cowen shareholders.

“The reality is that by selling its stake in Schwab, [TD] simply trade exposure to US wealth for exposure to US capital market. The diversification inherent in this trade is not necessarily a bad thing, although we note that the market generally prefers wealth to capital markets, especially after a historic cycle of mergers and acquisitions. On top of that, the track record of successful cross-border acquisitions in capital markets is weak, with people retention being the main medium to long-term hurdle,” Scotia Capital analyst Meny Grauman wrote in a note to clients. . .

The issue of talent retention is particularly sensitive in the investment banking industry, warned Adam Dean, the founder of Dean Executive Search, who previously served as chief of staff to the vice president of CIBC after serving in within CIBC Capital Markets.

“In investment banking, whether it’s focused on equity capital markets or broader M&A teams and hedging teams, it’s a very transactional business; and, as such, the individuals within it can tend to be quite transactional themselves. And therefore, the vision of the future can be paved with gold, and if they think there are wider opportunities for them with more money on different platforms, then that’s a risk that all investment banks face.
Dean, however, pointed out that TD and Cowen likely did themselves a favor on staff retention by appointing Cowen President and CEO Jeffrey Solomon to the TD Securities management team.

Cowen is the second major US takeover that TD has disclosed this year. In February, the Canadian bank announced that it had agreed to buy Memphis-based First Horizon Corp. for US$13.4 billion. This agreement is still awaiting final regulatory approvals.

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