Monday, September 04, 2006

How Scotia Capital Missed the Mining Wars

The Globe and Mail, Sinclair Stewart, 4 September 2006

Rick Waugh figures to make about $160,000 this year as a director of Inco Ltd., but he claims the experience itself will be invaluable. That's a good thing, considering his decision to join the nickel miner's board last summer may have cost Bank of Nova Scotia a shot at millions of dollars in advisory fees.

When the mining merger frenzy kicked off last fall, Canada's major bank-owned brokerages began jockeying and elbowing for advisory work.

RBC Dominion Securities nabbed part of the Inco assignment, and began working on the company's bid for Falconbridge Ltd. CIBC World Markets Inc. was tapped to help Falconbridge complete the deal, though it soon found itself playing defence against a hostile (but ultimately successful) bid from Anglo-Swiss mining giant Xstrata PLC. Xstrata was leaning on TD Securities Inc. for much of its strategic advice. Then there was BMO Nesbitt Burns Inc., which aligned itself with Vancouver's Teck Cominco Ltd. to help construct a hostile play for Inco.

Amid this alphabet soup of brokerage firms, one name was conspicuously absent: Scotia Capital Inc. The investment banking arm of Band of Nova Scotia, was the only one of the Big Five banks that did not land an assignment in the merger wars, arguably the most complex--and lucrative --collection of deals this country has ever seen. A successful mandate is worth somewhere between $20-million and $30-million, according to bankers working on the deals.

Some speculated that Scotia Capital was shut out because it lacked a strong mining team. Others, however, offered a different reason: Mr. Waugh, the bank's chief executive officer, had created a conflict by taking a seat on Inco's board.

"In terms of fees and the investment bankers and that, possibly we may have lost one or two mandates, that's hard to say. Looking at the players involved, I don't know whether we would have won one or two," Mr. Waugh in an interview. "I don't want to downplay the importance of M&A and that, but it's only a very small part of our business, and as I say, it is offset by having your chief executive officer be very much part of what's going on in the external world. And... there's very limited times that you might be in a conflicted situation."

Ten or 20 years ago, this might not have been viewed as a potential conflict; in fact, it might have even ensured that Scotia Capital would have been among the first in line for investment banking services or advisory help. Yet with the corporate governance zeitgeist in full swing, companies can't take enough precautions to safeguard against the mere appearance of conflict.

Indeed, Mr. Waugh is the only CEO among the country's largest banks who sits on a corporate board. Some of these CEOs believe their jobs are just too demanding to suffer the distraction and time commitments of an external director's job (each of them already sits on the board of his own company). But conflicts are an issue as well, given that Canadian banks have business relationships with so many companies across the country.

"We don't have a policy that forbids the CEO from [serving on a corporate board]," said David Moorcroft, a spokesman for Royal Bank of Canada. "But we do kind of have an unwritten policy that says the CEO won't sit on the board of a publicly traded company where its primary business is in Canada."

RBC's CEO, Gord Nixon, does not sit on any corporate boards. Nor does Canadian Imperial Bank of Canada boss Gerry McCaughey, who is only one year into the job, or Bank of Montreal head Tony Comper, who confines his directorships to charitable organizations.

Ed Clark, the CEO of Toronto-Dominion Bank, is not prohibited from doing board work, but has decided against it, said TD spokesman Neil Parmenter.

Scotiabank believes the experience of outside board duty outweighs the time pressures, not to mention the possible loss of advisory work. The bank encourages directorships for both its CEO and for high-performing candidates on its executive team.

"I guess we've been coming at it a little differently. I mean, you don't want to overdo the board experience, and we limited Rick to one, but we actually encouraged him," said Scotiabank chairman Arthur Scace. "I think that if you haven't seen how a board works or seen the dynamic of a board from the inside... I mean, the officers run the company, but ultimately if things go wrong the board is going to call the shots. And I think there's a lack of understanding by some officers of that sort of ultimate power."

With Inco, however, Mr. Waugh and Scotiabank may have gotten more than they bargained for. In hindsight, one may question the wisdom of joining a company whose industry is on the threshold of a massive consolidation, although Mr. Waugh argues mergers have become a fact of life in all sectors, whether it be natural resources or steel or energy.

He admits the workload has been "double or triple" what it would normally be, given the fevered pitch of the merger negotiations, and that he's had to make himself available at "pretty weird times" for the various board meetings. Yet he insists that the experience he has gained as an Inco director has made him a better CEO, providing him with first-hand insights into everything from corporate governance and anti-trust issues, to dealing with employees, customers, and regulators during a merger.

Inco is the subject of a takeover battle between Arizona's Phelps Dodge Corp., with which it has a friendly merger agreement, and Brazil's CVRD, which emerged late in the process with an all-cash bid--and which many believe will ultimately gain control of the Canadian mining giant.

When Inco is swallowed by one of these foreign rivals, Mr. Waugh will likely be without a director's seat. Will he think twice before considering another board assignment?

"No," he deadpanned. "I will think three times."

List of the dealers advising on the takeovers of Inco and Falconbridge:
• Inco: RBC Dominion Securities, Morgan Stanley, Goldman Sachs
• Falconbridge: CIBC World Markets
• Xstrata: J.P. Morgan, Deutsche Bank, TD Securities
• Teck Cominco: BMO Nesbitt Burns, Merrill Lynch
• CVRD: UBS Securities, Credit Suisse First Boston
• Phelps Dodge: HSBC, Citibank