August 3, 2022

Breakingviews: TD buys Cowen, and hopefully its people too

by Breakingviews.

Investment banking takeovers are always about the people. Toronto-Dominion Bank executive Riaz Ahmed repeated this truism on Tuesday, as his employer announced it was buying U.S. boutique Cowen for $1.3 billion. He’s only partly right, though. These deals are really about the money it costs to stop people from leaving.

TD’s cash offer for Cowen will give the Canadian lender a bigger toehold in U.S. capital markets without too much risk. Cowen makes around $2 billion a year in revenue, roughly half of it from advising on mergers and capital raising, and most of the rest from trading securities. Fused with TD’s securities business, the two will be roughly the same size as Wall Street rival Jefferies Financial. TD boss Bharat Masrani hopes to add an extra $300 million of annual revenue, equivalent to $100 million in earnings, by selling Cowen’s services to his existing clients.

As with most investment banking deals, TD’s real challenge is to keep Cowen Chief Executive Jeffrey Solomon and his team happy. In this case, the cost is $200 million in retention packages for Cowen’s bankers. Add in $250 million more in deal-related expenses and TD’s total outlay is around $1.8 billion – close to 7 times Cowen’s expected earnings two years from now, according to Refinitiv. That’s a lower multiple than Goldman Sachs, but well above Cowen’s five-year average valuation of 5 times earnings.

The other trouble with buying businesses that depend on people is that they come with personalities. That can help: Masrani says the two CEOs bonded over tales of Solomon’s Canadian grandmother. But it can also be problematic, because retail and investment banks have different cultures, and pay practices. Solomon took home $28 million last year, twice Masrani’s reported pay. The average Cowen employee’s compensation, around $680,000 in 2021, is more than five times that of their new TD colleagues.

Investment banking mergers have produced some grand culture clashes. Think of Merrill Lynch’s painful integration into Bank of America, or the trouble Nomura had digesting bits of Lehman Brothers. TD may be luckier with Cowen. If the hoped-for influx of business materializes, its bankers, usually in the top 20 in Refinitiv’s U.S. equity league tables, will probably vault into the top 10. For the $118 billion TD, Cowen is small enough, both in size and stature, that any indigestion won’t really show.



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