Tuesday, November 06, 2007

Oppenheimer to Buy Some of CIBC's US Businesses

The Globe and Mail, Derek DeCloet, 6 November 2007

So here's what makes Gerry McCaughey a good boss for CIBC: He does not give a damn about the optics.

Wall Street brokers are waist-deep in red ink and bad mortgages, their values are getting crushed, and even mighty Citigroup is staggering. Two of the biggest names in finance, Citi's Chuck Prince and Merrill Lynch's Stan O'Neal, have been pitched out of the glass towers, and that's just in the past week. Every major investment bank in the United States is worth less than it was six months ago, in some cases a lot less.

Who in his right mind would sell an investment bank now, near the height of the panic? Gerry McCaughey would. Not only that, he's not even selling it all for cash; CIBC is accepting warrants. And it's giving the buyer a loan, too. Man, if David Kassie were around to see this ... .

But that's the point. For Mr. Kassie and John Hunkin, architects of CIBC's next-we'll-take-Manhattan strategy in the 1990s, it was about ambition and ego and public displays of how powerful you are. They made a grand foray into the Wall Street equities business not because of sound strategy, but hubris. Mr. McCaughey got out of it because of, well, sound strategy, and because hubris is not his style.

The deal itself - selling the guts of CIBC World Markets' U.S. arm to Oppenheimer Holdings - is financially insignificant to a $33-billion financial institution. But it signals the end of an era and presents a timely lesson for other bankers with wanderlust. CIBC's venture failed, ultimately, because it sought to take a Canadian model of banking and transplant it.

Investment banking in Canada, as practised by the Big Five, is based on the banks' considerable negotiating power. Loans are used as bargaining chips for more lucrative business. You want a $100-million loan, do you, Mr. CEO? Very well. But we'll take the lead underwriting role on that equity deal you're planning, thanks very much. Oh, and don't forget to call us when you're ready to follow up on that merger idea our investment bankers have presented (eight times).

CIBC may not have exactly duplicated this on Wall Street, but it certainly tried to emulate the cross-selling notion. One of Mr. Kassie's big ideas, for example, was to invest lots of the bank's money in venture capital and buyout funds. If CIBC owned a little bit of 100 different funds, and each of those owned 20 different companies, he reasoned, that's 2,000 potential investment banking clients. CIBC would then have the connections, even if it lacked the brand name of Goldman Sachs or Morgan Stanley. (A taste of the hubris: Early on, the bank ran advertisements on CNBC that featured a Hummer climbing a set of stairs and blowing by a group of men in suits.)

Alas, it turned out that the best young U.S. companies still wanted to use Goldman Sachs or Morgan Stanley. ("A CFO doesn't want to go to a cocktail party and tell people his deal is led by CIBC World Markets," sniffs one investor who specializes in financial stocks.) CIBC found it couldn't use the muscle of its balance sheet on Wall Street the way it does on Bay Street. It had some modest success in the tech sector, and there was that huge, multibillion-dollar windfall on its investment in Global Crossing. But that was before events - the tech collapse, the Enron scandal, the lawsuits and Department of Justice investigation - began to turn against the bank.

So Mr. McCaughey offloaded his problem. The buyer, Oppenheimer Holdings, is a strange little company. Its head office is technically in Toronto, but it isn't listed on the TSX any more, does almost all of its business in New York and is run by a New Yorker named Albert Lowenthal. It has taken unwanted assets off CIBC's hands before, namely 600 or so retail stockbrokers.

Despite the stupendous timing of that deal, coming just weeks after the market hit bottom in 2002, it hasn't totally paid off for Oppenheimer shareholders; the stock has underperformed the Amex broker-dealer index over the past five years. The governance raises an eyebrow or two. Mr. Lowenthal owns a 22-per-cent economic stake, yet controls the company absolutely (the listed shares are non-voting). His contract entitles him to a direct share of the pretax profit, and the company is paying for his son - the highly-paid head of IT at Oppenheimer - to get an executive MBA at Columbia University.

OK, so it's not the world's greatest brokerage firm. But Mr. McCaughey can do the math. Mr. Lowenthal is in his early sixties; Oppenheimer is probably too small to make a go of it, in the long run. That makes it a takeover play. If it can raise its share price by 10 per cent annually for the next five years, then sell for a reasonable takeover premium, CIBC's warrants alone should be worth about $50-million (U.S.). Add in the cash portion and the proceeds from the 2002 sale, and maybe, just maybe, the whole thing wasn't such a costly learning experience after all.
Financial Post, Duncan Mavin, 6 November 2007

Amid turmoil in the global banking sector, CIBC chief Gerry McCaughey says he will use capital freed up by the sale of the company's investment banking unit to shore up its balance sheet rather than growing other business lines.

"I would see capital strength taking somewhat precedence over capital deployment at this time," Mr. McCaughey said on a conference call.

The move out of a riskier business segment is consistent with Mr. McCaughey's fixation on trimming volatility from Canadian Imperial Bank of Commerce's earnings.

The bank said the sale will release $200-million of capital.

But it does not appear likely CIBC will be spending its cash on expanding other businesses and the sale of the unit will heighten concerns about whether Mr. McCaughey can expand CIBC's top line as well as cut costs.

"CIBC is nowhere near as risky a bank as it was at the end of last week," said Dundee Securities analyst John Aiken.

However, reduced earnings volatility has come at the cost of growth, Mr. Aiken said.

CIBC lags behind some of its competitors with its domestic retail offering, in a market where it is tough to gain a bigger share of deposits, mortgages and the like without hurting the bottom line by offering better rates to customers.

Overseas, CIBC has raised its ownership stake in First-Caribbean Bank to 91.5% from 49.5% for a total cost of $1.1-billion.

But last month the bank showed it may have less appetite for further growth in the Caribbean region than even domestic rivals -- Royal Bank of Canada splashed out $2.2-billion to buy Royal Bank of Trinidad and Tobago, which had been viewed by many in the industry as a likely target for CIBC.

This week's announced deal sees CIBC getting out of several U.S. business lines, including investment and corporate banking and debt capital markets.

The subprime mortgage-related turmoil in the United States was "likely the final straw [for CIBC's U.S. investment bank] and Gerry Mc-Caughey has decided that the only way to ensure that there will not be any more charges emanating from U.S. wholesale is to sell the operations," said Dundee's Mr. Aiken.

Banks in the United States and elsewhere have seen multi-billion write-downs related to capital markets in recent weeks, and several high-profile executives have lost their jobs.

Mr. McCaughey said the market is "fairly unpredictable" and has deteriorated at a surprising pace.

The deal announced Sunday sees CIBC offload a large part of its U.S. investment banking unit, worth about $400-million in annual revenue, to Oppenheimer Holdings Inc.

The bank will record $175-million in severance and other costs, and will retain some upside potential through options on Oppenheimer shares and deferred performance payments.

Since Mr. McCaughey became chief executive officer in August, 2005, he has tightened ship at the once accident-prone bank.

The CIBC chief inherited an organization with a reputation tainted by bad loans and an entanglement with Enron that cost it a $2.5-billion legal settlement.

A cost-cutting exercise slashed hundreds of millions of expenses off the bottom line, as Mr. McCaughey focused on stabilizing earnings by reducing exposure to riskier operations.

In the most recent quarterly reporting announcement in August, CIBC World Markets' said it incurred mark to market losses, net of hedges, of $290-million on structured products related to the U.S. residential mortgage market.

The bank disclosed that its exposure to the U.S. residential mortgage market was approximately US$1.7-billion.

CIBC also said yesterday it is rearranging its investment banking management team following the announced deal.

Phipps Lounsbery, head of debt capital markets, will be leaving the bank next week.

Head of investment banking David Leith becomes deputy chairman of CIBC World Markets, with an expanded mandate that includes securitization. Global equities chief Richard Phillips also becomes a deputy chairman and is now also head of fixed income and foreign exchange.

CIBC is keeping some of its U.S. business lines including real estate finance, merchant banking and oil and gas advisory.
Financial Post, Barry Critchley, 6 November 2007

After the events of the weekend, maybe CIBC, the smallest of the Big Five chartered banks, should consider changing the name of its wholesale and corporate banking arm.

Known as CIBC World Markets, the entity will now be less worldly with activities in less markets than it was at the end of last week.

The reason: the sale by CIBC of its U.S. domestic investment banking, equities, leveraged finance and related debt capital markets businesses; its Israeli investment banking and equities business, and certain parts of other U.S. capital markets-related businesses based in the U.K. and Asia.

Those businesses have assets of about $2-billion and generate revenue of about US$400-million a year.

CIBC's main non-Canadian activities will be confined to real estate finance, equity and commodity structured products, merchant banking and oil and gas advisory, and some U.S. debt capital markets pursuits. Those groups will employ about one-third of the staff that was part of CIBC World Markets.

They will be allocated about $600-million of capital -- or 75% of CIBC's capital commitment to the U.S.

So what do all these decisions -- described as being driven by strategic considerations and not as a response to the current credit crunch environment -- mean for the firm's Canadian operations?

In a conference call yesterday, Gerry McCaughey, CIBC's chief executive, was asked about the ability of CIBC World Markets to compete in the U.S. market with the other Canadian-based dealers and the U.S. domestic firms. Naturally enough McCaughey said the firm's ability wouldn't be diminished.

"We have had a successful Canadian investment banking business and very important to us in considering this transaction was the continued success of that business," he said, adding that the "capacity" of the firm's domestic investment banking business to operate internationally "is not inhibited in any way by this transaction. We do not have a noncompete as part of this transaction," a comment that could lead to the impression that CIBC, at some future date, may re-enter the U.S investment banking business. Don't bet on it.

Brian Shaw, chief executive at CIBC World Markets, said the firm "will be undertaking a modest reorganization of some of our businesses."

Other observers don't share the optimism of the CIBC executives.

"At the margin it will definitely hurt some of their Canadian business," said one investment banker, who adds that other Canadian firms, including RBC Capital Markets and TD Securities "can at least make noises of having a U.S. platform. These guys can't do that," he said.

And clearly part of CIBC's pitch was that it could deliver the U.S. market to a Canadian issuing client. "The Canadian guys used to make noise of their U.S. capability. That [absence] will hurt them," he said. "The local business will do a lot worse next year than it did this year."

There will be other consequences for the firm: some of its analysts who covered Canadian stocks from New York will now be working for a U.S. firm--a separate public company. Accordingly the firm will have to reassign the work done by those analysts.
Bloomberg, Doug Alexander, 5 November 2007

Canadian Imperial Bank of Commerce, whose U.S. investment bank has had $2.6 billion in writedowns since 2005, is shedding most of its U.S. businesses to lower risk, analysts say.

Canada's fifth-largest bank said late yesterday it agreed to sell part of its New York-based investment bank to Oppenheimer Holdings Inc., a boutique investment bank. The sale includes the U.S. investment banking, equities, and leveraged finance businesses. CIBC is also selling its investment bank in Israel and other units in the U.K. and Hong Kong.

``This transaction substantially reduces its exposure to the areas of the business that have historically plagued CIBC's results,'' Dundee Securities analyst John Aiken said today in a note to clients.

Chief Executive Officer Gerald McCaughey has sought to reduce risk since 2005, when Toronto-based CIBC set aside $2.4 billion to settle claims from investors of failed energy trader Enron Corp. In August this year, CIBC recorded a C$190 million ($204 million) writedown from investing in securities tied to U.S. mortgages. CIBC will have more writedowns in the fourth quarter from mortgage-backed investments, the bank has said.

CIBC shares rose 10 cents to C$98.20 at 4:10 p.m. on the Toronto Stock Exchange. Oppenheimer rose $3.99, or 9.4 percent, to $46.24 on the New York Stock Exchange, the biggest gain in almost three months.

CIBC will keep its U.S. businesses that offer real estate financing, merchant banking, oil-and-gas advisory, structured products and some debt operations. McCaughey said today in a conference call that the sale allows CIBC to ``redeploy capital'' for its Canadian, U.S. and international operations. He said an acquisition is ``improbable.''

``The environment is one that has proven to be both fairly unpredictable and has had a deteriorating element to it that has proceeded at a pace that has been somewhat surprising,'' he said on the call.

Oppenheimer will pay CIBC a combination of cash, shares and debentures, payable on the fifth anniversary of closing. As part of the agreement, CIBC will lend Oppenheimer $100 million to support trading operations and up to $1.5 billion in credit to help finance loan underwriting.

Oppenheimer will pay CIBC an amount based on the performance of the businesses between 2008 and 2012, with $25 million guaranteed, plus warrants for 1 million shares at $48.63 each at the end of five years. The sale is scheduled to close Jan. 2 subject to approvals, with a later closing date for the overseas businesses.

The CIBC World Markets investment bank ranks 17th for U.S. stock sales this year, with 15 transactions worth $828 million, according to data compiled by Bloomberg. CIBC ranks 15th this year for announced U.S. mergers, with 56 takeovers worth $66.6 billion, according to Bloomberg data.

The businesses Oppenheimer is buying have annual revenue of about $400 million and employ more than 700 people, Oppenheimer said. CIBC has approximately 1,300 employees in the U.S., which mainly support the investment-banking business.

``The fact that 30 percent of the World Markets headcount was providing just 14 percent of the revenue speaks to the negative impact on efficiency that the U.S. capital markets business has had on CIBC,'' Merrill Lynch analyst Sumit Malhotra said in a note to clients. He rates CIBC a ``buy'' and doesn't own the stock.

CIBC bankers affected by the sale may include Charles Holmes, head of U.S. equities; Andrew MacInnes, co-head of U.S. equity capital markets; and John Parks, head of U.S. equity research. Analysts include John Glass, who covers restaurants, and Meredith Whitney, whose downgrade of Citigroup Inc. last week triggered the stock's steepest retreat since September 2002.

CIBC will record one-time costs of about C$50 million, or 10 cents a share, for asset write-offs and severance packages from the sale, Chief Financial Officer Tom Woods said in the call. CIBC will also record C$100 million in the first quarter and C$25 million for the rest of fiscal 2008 for severances and other sale costs. CIBC reports fourth-quarter results on Dec. 6.

The transaction reverses most of CIBC's U.S. expansion. The bank bought Oppenheimer & Co. in 1997, and then sold the private client and asset management businesses to Fahnestock Viner Holdings Inc. in 2003. Fahnestock Viner changed its name to Oppenheimer Holdings in September that year. CIBC also closed Amicus, an online-banking business, in 2002.

CIBC will report a ``large gain'' in the fourth quarter from the restructuring of the Visa Inc. credit-card network, Woods said. That gain will exceed writedowns from mortgage- backed securities, he said.

CIBC will also have a ``modest reorganization'' of some of its investment banking operations, CIBC World Markets CEO Brian Shaw said in the call. The bank is ``constraining'' activities tied to mortgage-backed securities such as collateralized debt obligations.

``We've decided that the business prospects in that area are going to be limited,'' Shaw said. ``We intend to move forward on a narrowed, or restricted basis and the focus currently is on management of existing risks."
Financial Post, Duncan Mavin, 5 November 2007

Canadian Imperial Bank of Commerce has shed some of its riskier business lines by selling off its U.S. investment banking operations, but at what cost?

The bank’s deal with Oppenheimer Holdings Inc. will boost CIBC’s stock valuation as the discount it is awarded for being “accident prone” should dissipate, says Dundee Securities analyst John Aiken.

But the bank’s growth plans have been unclear at least since chief executive officer Gerry McCaughey took over in 2005 and began a cost and risk-trimming exercise.

After selling off the majority of its U.S. wholesale operations, “future growth now effectively relies on domestic,” with the capital markets franchise weakened because of its minimal presence in New York, Mr. Aiken says.

“Outside of FirstCaribbean” — CIBC’s retail bank in the islands — “CIBC does not have any obvious high growth avenues for the mid to longer term. Further, CIBC’s investment banking operations will likely be at a bit of a disadvantage with its now lack of ability to provide integrated cross-border solutions,” says the Dundee analyst.

He also notes that the bank may not even have got the best deal because it sold the operations at the bottom of the cycle.

“We believe that the subprime mortgage losses experienced in the third quarter were likely the final straw and Gerry McCaughey has determined that the only way to ensure that there will not be any more charges emanating from the U.S. wholesale is to sell its operations,” Mr. Aiken says.

Despite hindering longer term growth however, the deal will likely have little near term impact on earnings. Consequently, Mr. Aiken has left his rating for CIBC at “market neutral,” with an unchanged target price of $105.
Bloomberg, Sean B. Pasternak and Doug Alexander, 4 November 2007

Oppenheimer Holdings Inc., a boutique investment bank, will buy part of the U.S. investment banking business of Canadian Imperial Bank of Commerce to offer more services to its investment-banking clients.

The price of the transaction wasn't disclosed. The sale includes CIBC's equity research and options trading units, CIBC said today in a statement. CIBC, Canada's fifth-largest bank, will keep its U.S. businesses which offer real estate financing, merchant banking and equity and commodity structured products.

CIBC Chief Executive Officer Gerry McCaughey has said the Toronto-based bank will focus on containing costs and on the bank's main Canadian franchise, where it does most of its business.

``The sale of these assets does allow CIBC to redeploy capital over time and support our high growth core Canadian businesses as well as our ongoing U.S. businesses,'' CIBC spokesman Rob McLeod said in an interview.

Oppenheimer said in a statement the transactions helps them to offer a ``suite'' of products to clients such as merger advice, underwriting and loan syndication.

Oppenheimer will pay CIBC a combination of cash, shares and debentures, payable in the fifth anniversary of the transaction's closing. Oppenheimer spokesman Brian Maddox didn't immediately return a phone call placed after business hours seeking comment.

As part of the transaction, Oppenheimer will borrow $100 million from CIBC.

The businesses Oppenheimer is buying employ more than 700 people and have annual revenue exceeding $400 million. The transaction is expected to close in January.
The Globe and Mail, Tara Perkins, 4 November 2007

Canadian Imperial Bank of Commerce is scaling back its U.S. capital markets business, agreeing to sell a swath of it to Oppenheimer Holdings Inc.

In a deal that will include roughly half of CIBC's 1,300 employees in the United States, Oppenheimer will pick up CIBC World Markets' U.S. investment banking, corporate syndicate, institutional sales and trading, equity research and options trading businesses, as well as a portion of the debt capital markets business. Some operations in the U.K., Israel and Hong Kong are also included.

The deal's value will depend on how the business performs in coming years as it combines with Oppenheimer's operations.

"This transaction gives CIBC the opportunity to benefit from Oppenheimer's future success," stated CIBC chief executive Gerry McCaughey.

"It will also permit CIBC to redeploy capital over time to further support the continued growth of our strong and profitable U.S. and international operations, as well as our core Canadian businesses."

The businesses being acquired by Oppenheimer employ more than 700 people in the U.S. and overseas. Annualized revenue for the businesses - based on recent results - exceeds $400-million (U.S.), Oppenheimer said in a statement.

CIBC said it does not expect the deal to have a material impact on its earnings per share or Tier 1 capital ratio, either at closing or on an ongoing basis.

"We are pleased to once again be partnering with CIBC and believe that the combination of these resources will significantly increase Oppenheimer's penetration in capital markets," said Oppenheimer CEO Albert Lowenthal. "The timing of this acquisition will permit us to gain market penetration at a time that other firms are pulling back."

The purchase price for the deal is made up of an "earn-out," or payment that will be based on the annual performance of the capital markets division in the coming four years. That payment, to be made in 2013, is guaranteed to be at least $20-million.

In addition, the purchase price includes warrants to buy 1-million Oppenheimer shares at $48.63 a piece in five years. Cash will also be paid for certain fixed assets.

As part of the deal, Oppenheimer will borrow $100-million from CIBC in a five-year subordinated loan. CIBC will also provide a $1.5-billion warehouse facility.

The transaction is expected to close on Jan. 2 for all of the U.S. businesses, with a later closing date for overseas operations.

CIBC said it will still be active in U.S. real estate finance, equity and commodity structured products, merchant banking and oil and gas advisory. The bank will also keep its corporate lending capability and its ability to distribute Canadian equities and fixed income products in the U.S. and international markets on behalf of its Canadian clients.

The deal is "in line with our strategic imperative to achieve consistent and sustainable performance over the long-term," stated Mr. McCaughey.

Many major American investment banks have been suffering in the wake of August's credit crunch and the U.S. subprime mortgage meltdown.

CIBC revealed in August that its exposure to the U.S. subprime mortgage market was about $1-billion (U.S.).

CIBC World Markets analyst Darko Mihelic wrote a note to clients last week about the big Canadian banks, titled "Expect an Ugly Q4," in which he predicted that capital markets weakness would lead to lower profits in the final quarter of the year.

He said there is a good chance that National Bank and the Bank of Montreal will pre-announce some losses, while CIBC "may elect not to pre-announce losses on sub-prime, as its VISA gain will likely offset."

CIBC bought Oppenheimer & Co. in 1997, as it sought entry into the U.S. investment banking industry.

But five years later, the bank was chopping more than 700 jobs in its U.S. investment banking and wealth management operations, and in 2003, it sold the retail brokerage CIBC Oppenheimer to New York-based Fahnestock Viner Holdings Inc. for $257-million (U.S.).