Last dance. The up-tempo frenzy of gonzo capitalism is waning, readying itself for the waltz that ends the party. Hugging the walls of the darkened auditorium are the last two players without a significant partner. In one corner, the National Bank of Canada, the country’s sixth-largest bank, mired in its Quebec base, the only lender without a serious presence on Bay Street or in the West. Skirting the far wall, Toronto-based First Marathon Inc., the only remaining independent stockbroker not in the arms of a big bank or an American rival.
At first blush, they are an unlikely pairing. National Bank, with its brokerage subsidiary, Lévesque Beaubien Geoffrion Inc., reeks of Gallic elegance—old school and overly focused on the small retail investor. First Marathon—“First Larry” to some, after its 57-year-old founder and CEO Lawrence Bloomberg—is the epitome of eat-what-you-kill Bay Street
buccaneering, the masters of the freelance deal. But their eyes met across the darkened room. After a courtship that began in early May (National Bank made the first move) and broke off for a two-week hiatus, the two are now on the way to the altar. For $712 million—or $26 a share, $2 a share less than First Marathon was trading for—the National Bank bought itself a national dealership and is planning to integrate First Marathon, First Larry and all, into its Lévesque Beaubien subsidiary. The dance of the misfits? The wallflowers coming together at the end of the night after all the other partners have been formed? Or a creative pairing of two distinct business cultures that can challenge the best in each other? Even The Street is having a tough time figuring this one out.
“It’s a reasonable fit as long as they can make the cultures work,” notes Stephen Jarislowsky, the veteran industry watcher and chairman of Montreal-based Jarislowsky Fraser Ltd. “But in Lawrence Bloomberg you’ve got a semigunslinger and in Lévesque Beaubien a very conservative old lady. What’s the result? You might get a three-headed baby.” I That’s not how the principals see it, mind you. With $2 bil! lion set aside for acquisitions, National Bank is trying to buy 'S its way out of its Quebec base in much the same way that I Bombardier Inc. and Quebecor Inc. expanded into the rest of I Canada and North America. “You have to have a strong pres| ence in your national market if you really want to achieve a % presence outside your country,” said National Bank chairman ! André Bérard. “And this is what we are doing today.”
I Eleven years ago, National bought Lévesque Beaubien, now
I the seventh-largest brokerage house in the country. With I 2,200 employees and offices across Canada, Lévesque
Beaubien has a large network servicing the small retail investor. But it has nothing like First Marathon’s clout with big institutional investors on Bay Street or its ability to underwrite large mining and energy plays in Calgary and Vancouver.
This is the “fit” that bank analysts say could make this deal work and will leave job losses at a minimum. Toronto will be the base for institutional business and even some forays into merchant banking and innovative underwriting; Montreal will host the retail operation. Bloomberg and Lévesque Beaubien president Pierre Brunet will be co-CEOs of the new venture, while Bloomberg, an ex-Montrealer, joins the National Bank board—his first major board appointment in an overachieving career. With two semi-distinct operations, the proponents are hoping to keep culture shock to a minimum. But they may not be as far apart as many people think.
Stung by some huge problem loans from the high-flying 1980s—including about $150 million to developer Robert
Campeau and as much as $500 million to the Reichmann’s Olympia & York Developments Ltd.—National Bank has since focused on the small and medium-sized lender, developing an affinity for the entrepreneur. Similarly, despite its enviable record of never posting a losing quarter in 20 years, First Marathon has never become the brokerage of choice for the blue chips. Perhaps it is because of the firm’s aggressive approach (it was fined last July over a junior mining stock promotion), perhaps because of Bloomberg’s driven style—first in his commerce class at Concordia University, first to suss out the trend to discount brokering, first to pay himself and his partners the big multimillion-dollar bonuses. So First Marathon, too, has found its niche with midsize entrepreneurs, such as soft-drink-maker Cott Corp., Semi-Tech Corp. and Barrick Gold Corp. (in its early days). “I think the National Bank in its business approach is different than the big
banks and I think First Marathon is different than’other brokers,” says Bérard. “The major difference is the drive for the customer. So we are going to compete with the larger banks, but remain what we are—a different group of people.”
By National Bank reckoning, the new brokerage house will have more than $600 million in revenue, 90 offices, 2,700 employees, $38 billion in assets and revenue split almost equally between retail sales and capital markets. It should have about eight per cent of the revenue of both the retail and institutional markets—a significant share, but a far cry from the Royal Banks domination through RBC Dominion Securities Inc. The deal itself, at 1.65 times the deemed book value of First Marathon, is at the low end. U.S. giant Merrill Lynch & Co. Inc. paid a whopping $ 1.26 billion or three times book value for Midland Walwyn Inc. last summer. But this was for a retail brokerage with traditionally higher profit margins.
From First Marathon’s perspective, it needed this deal, too. The equities business is shrinking because of electronic trading and the entry of the banks. Without the deep pockets of a bank, First Marathon ran the risk of being left in a backwater. “We basically had two choices,” Bloomberg told Macleans. First Marathon could set up its own merchant bank-style operation, borrowing the money from pension funds, and hiring its own specialists; or it could integrate with an existing lending institution. “Integration,” he said, “gets it done in a very short period of time.” Asked if he felt pained at leaving behind something he had built from scratch, Bloomberg paused for a moment and said: “Not really. I thought I might. But I view this as a way of stepping up.” Stepping up? Is this about getting respect for a brokerage just outside the Establishment’s embrace? Not according to
Tom Kierans, the head of the C. D. Howe Institute and the longtime Bloomberg mentor who first lured the young hotshot into the investment business more than 30 years ago. “It’s more an indication of impatience,” he said. “First Marathon has been doing very well for itself. But it has been treading water for 20 years. This is the chance to move on.”
Bloomberg says he has no intention of slowing down and even if he hadn’t signed an agreement to stay with the new enterprise, he would have done so out of “a moral obligation.” He is cranking up plans to expand his side of the empire, including high-paying bonuses to attract the best and brightest, a practice that might give cautious bankers a moment’s pause. Can he adapt to the institutional norms of a national bank? He demurs. A better question: can it adapt to him?
Shopping for Investment Houses
Bank Bank of Canada Bank of Montreal Éarik National Bank of Canada
Brokerage Bought 1988 Wood Gundy Corp. 1988 Dominion Securities Inc. 1996 Richardson Greenshields of Canada Ltd. 1987 Nesbitt Thomson Inc. 1994 Burns Fry Ltd. 1987 TD Securities Inc. (created by the bank) 1988 Lévesque Beaubien and Co. Inc. 1989 Geoffrion Leclerc Inc. 1999 First Marathon Inc. (subject to approval)
Total Bank Assets $269.6 billion $267.3 billion $221.5 billion $219.7 billion $208 billion $74.7 billion 1999 second-quarter results
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