Monday, April 03, 2006

GMP Targeted, as Investment Banks Eye Mergers

Focus on small- to mid-cap sector deemed a winner as dealers strive to build strength

The Globe and Mail, Andrew Willis, 3 April 2006

The deal makers may be lining up deals of their own, as Canadian investment banks eye takeovers of rivals to better take advantage of red-hot markets.

There have been informal merger talks between several brokerage houses in recent months, as investment banks strive to build strength in every line of business. The focus is on acquiring expertise in energy, mining, trusts and mergers and acquisitions. Dealers with a proven strength in these sectors are hearing approaches from rivals that want to bulk up.

The most coveted platform is GMP Capital Trust, the parent of institutional boutique GMP Securities LP and retail brokerage GMP Private Client LP. Its focus on small- to mid-capitalization resource companies is a winner in this market. There is ongoing speculation that Goldman Sachs Group Inc. or another U.S. dealer lacking an equity operation in Canada may buy the publicly traded firm.

GMP senior managers recently had get-to-know-you chats with Goldman's new Canadian executive team, according to sources at GMP. Units in the GMP Trust hit an all-time high of $24.95 last week and closed Friday at $24.90.

There are three major global brokerage houses with Canadian-based equity operations: UBS Securities, Merrill Lynch and Credit Suisse First Boston. Dealers such as Goldman and JP Morgan Canada have fixed income and corporate finance departments, but no domestic equity desks.

Dealers such as GMP are in the market's sweet spot right now, compared with the international firms, according to statistics prepared by the Investment Dealers Association of Canada. In a report last week the IDA said: "Although cross-border financings were up last year, the bulk of the takeover landscape was in the domestic, small- to mid-market. This backdrop favoured the domestic institutional players over the foreign firms"

Other brokerage houses trying to muscle up through takeovers include publicly traded Jovian Capital Corp. and Dundee Wealth Management Inc. Jovian owns a brokerage house called MGI Securities and made overtures to institutional boutique Westwind Partners Inc., according to sources close to both firms. Westwind was not interested in a merger, these sources said.

Dundee is controlled by financier Ned Goodman and recently drafted Kym Anthony as its chief executive officer. As CEO of National Bank Financial Inc., Mr. Anthony oversaw the integration of two large dealers. Dundee is said to have looked at a takeover of employee-owned Sprott Securities, which rebuffed overtures.

A number of other dealers, including Blackmont Capital Inc. and Wellington West Capital Inc., have already done small acquisitions and made no secret of their interest in larger dealers. The problem right now is the market features more buyers than sellers. Investment banking takeovers also have an extra degree of difficulty compared with deals in industrial companies because they have to be employee-friendly, as a dealer's only real asset is human talent.

The urge to merge comes as dealers strive for share of a record-setting market. Industry wide, 2005 was a record-setting year for Bay Street, and the torrid pace of financings and takeovers has continued through the first three months of 2006.

IDA statistics show the investment banks posted a record $4.3-billion of operating profit in 2005, shattering the previous all-time high of $3.6-billion in 2004.

In the past, investment banks have staged takeovers when markets are soaring. Most of the Canadian banks acquired brokerage houses in the runup to the 1987 market crash, while Merrill Lynch bought Toronto-based Midland Walwyn Ltd. just before the dot-com bubble burst in 2001.