Neither of the participants will publicly acknowledge the fact, but secret negotiations to create the country’s largest single financial institution are reaching the point of no return. The megamerger would unite the Royal Bank of Canada and Wood Gundy Inc. into a $100-billion-plus institution, able to compete with the largest of the American, British and Japanese money houses.
What makes Wood Gundy, Canada’s second-largest investment dealer (just after Dominion Securities Pitfield) so attractive to Canada’s largest bank is that it would give it a ready-made brokerage function when chartered banks are allowed to enter that business later this year. The deal would allow the Royal to command the heights of its domestic marketplace, so that no matter how large some of the foreign newcomers to Bay Street may be, it would continue its accustomed status as this country’s most powerful financial institution.
For Wood Gundy, the deal makes sense for many reasons, not the least of them that its chairman, Ted Medland, has to try and redeem himself after last year’s fiasco, when the marriage he put together with Gordon Capital Corp. faltered, literally at the altar. At the time, Medland admitted that without a merger of some kind, “no matter how good we are, over time we would wither and die.”
The arrangement, still being negotiated, would give the Royal majority stock ownership in the Toronto-based investment house. (The chief remaining stumbling block to the sale is the valuation of Wood Gundy and how many times book value the final price should be.)
While the corporate culture of the Royal is a lot closer to Wood Gundy’s elitist style than that of Gordon Capital’s Jimmy Conacher, who is Bay Street’s favorite renegade, there will still be problems in meshing the two operations. Banks operate according to fairly strict hierarchies and slow promotions based as much on loyalty as imagination. Investment dealer employees live fast and furiously, speaking up to their bosses, who readily forgive them $l-million mistakes—if they make up for it the next day.
Allan Taylor, the chairman of the Royal, will not comment on the possible purchase, but he did tell me re-
cently that his bank is “keenly interested in getting into the investment business, because we’re watching the top end of our client base move away from us toward the brokerage houses through the securitization of large loan portfolios, swaps and other foreign investment activities, all now being done by Bay Street. We are losing our position in that market sector and want to be sure that we’re in it for the long run.”
Although Taylor has only been in his job less than a year, he has made some fundamental changes in the Royal’s operating style, transforming it into a much less stodgy and more entrepreneurially minded institution. With only $240 million outstanding in the Dome portfolio, he is most worried about the settlement of the Third World debt issue, where the Royal is a major player, with $5.8 billion left to be repaid.
“It has been acknowledged for at
least the last 20 months,” he said, “that we have to get on with something different in trying to resolve the debt problems, and that means longterm restructuring so that these countries can go back to growing again and become credit-worthy once more. The arguments for not making concessions on paybacks to borrowers, no matter how big, are really unanswerable. If we were to write off their debts, we would have to do it for everybody. Why wouldn’t the argument apply equally for the farmer in Western Canada or the autoworker who finds himself out of a job?”
Earnings in the Royal’s first quarter were down by 19 per cent from a record first quarter last year and its price/earnings ratio has been one of the lowest of any Canadian bank. Taylor points out that this was due in part to onetime losses, including the bank’s sales of its Trinidad and Tobago operations and the difficulties it has been experiencing with Orion Royal Bank, its merchant banking subsidiary in London. “The good news,” he maintains, “is just about everything else.”
Unlike most big-businessmen, Taylor has a few kind words to say about the Mulroney government, praising it for its deficit reductions and the free trade initiative: “We think we can stand up to whatever the foreign banks might bring here under free trade,” he said, “and have in fact been doing just that in the past five years since the Schedule B banks have had a strong presence here. But for the investment dealers, competing will be more difficult, which is why they will need more capital and more alliances, either through acquisitions or just networking.”
Taylor’s initiative with Wood Gundy could transform both institutions into a new monolith which would give this country the kind of world-class fiscal clout we desperately need to stay in the running. What such a merger will not accomplish is one-stop financial shopping. Taylor says that such a concept is not practical or desirable, because people who need advice in any area of their spending or saving prefer to consult recognized specialists in each field.
But if the Wood Gundy acquisition takes place, it could be the signal for a rush by Canada’s other Big Six banks to nail down similar alliances—before the foreign money players move in and take over Bay Street.
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