Stop Flogging the Dead Cdn Bank Merger Horse

The Globe and Mail, Eric Reguly, 16 July 2005

Memo to Ralph Goodale: Shut up already.

Early this week, the Finance Minister proved he's happy to make a ritual of embarrassing himself. Every few months, he opens his cake hole to blather about bank merger guidelines. They're coming, he insists. Yup, really. Trust me -- I'm from Saskatchewan. The Ottawa press pinheads slap the quote into their laptop's automated bank-merger story software and another headline is zapped across the land: "Goodale to address bank mergers," or "Bank merger rules still coming."

Both of those headlines came from 2004. Similar stories appeared at various times this year ("I know the financial institutions are anxious to have clarity as rapidly as possible," he said in February). Then, on Monday, His Ralphness suggested, but did not promise, the guidelines are coming "this fall."

Can you stand the excitement? The phony war is over. Canada's Big Five Banks could turn into the Big Three by Thanksgiving. Your new GodzillaBank Visa card will be in the mail soon.

Forgive us, Mr. Goodale, if we don't believe the financial services revolution is imminent. But never mind. The real mystery is why the minister bothers to mention an issue that most of the banks don't care about any more. With the exception of Scotiabank, where CEO Rick Waugh has X-rated dreams about bank mergers -- believe us, you don't want to get cornered by this guy at a cocktail party -- a post-merger world is not on the agenda.

Take TD Bank. In 1998, TD tried to merge with CIBC, although its heart wasn't into it -- the plans were purely in reaction to the equally doomed Royal-Bank of Montreal union attempt. While Royal and BMO whined ad nauseam about the merger moratorium, TD got on with its life. In 2000, it bought Canada Trust. A few years later, it pushed into the U.S. Northeast with the purchase of Banknorth. This week, Banknorth agreed to buy Hudson United Bancorp of New Jersey for $1.9-billion (U.S.). If the pace continues, TD will be one of America's Top-20 commercial banks in no time.

TD is not pursuing a deal with a Big Five rival. It doesn't want to go through the hassle of another Canada Trust-style merger. By now, it knows a Canadian merger is not required to pursue its American ambitions.

TD once did a study of the American market and determined that 10 U.S. banks would meet its budget and strategic requirements. It repeated the study under the assumption a Canadian merger had doubled its size. The universe of potential U.S. targets expanded to only 14. In other words (according to TD anyway), the Canadian banks are so small by international standards that they would have hardly any more financial firepower even if they were twice the size.

CIBC and BMO are not wasting a lot of time lobbying for mergers. CIBC would be just as happy, or happier, falling into the lap of a life insurer, and in fact tried to prostitute itself to Manulife a few years ago (the Liberals fixed that one too). BMO might be happy to merge under the right conditions. In the meantime, it's finally paying attention to its lonely Harris Bank subsidiary in Chicago. Last week, Harris bought Villa Park Bank for $81-million (Canadian).

Royal says it's in no rush to see merger guidelines. Translation: It's so big -- with 1,433 branches, 4,000 bank machines and a market value of $50-billion -- it knows the feds wouldn't allow it to merge unless it unloaded half of its branch network. In which case, what's the point?

That leaves Scotiabank, which still believes heft would allow it to bulk up internationally (although not in the United States) at a faster pace. Mr. Waugh may be right. But is Mr. Goodale going to publish merger guidelines because one big bank, and a bunch of tiny credit unions, want them? The credit unions, which might represent 17 votes for the Liberals, hope to buy branches shed by any banks that head to the altar. Under a forced sale, the branches would go cheap.

The Liberals are going into an election in early 2006. Bank mergers are a net vote loser under any scenario because less competition is bad for consumers and businesses, end of story. Even when the Liberals had a majority, they were sensible enough not to touch the subject. With a minority government, why bother, especially since the better part of Bay Street is not screaming for mergers?

If Mr. Goodale were true to his plain-speaking Prairie roots, he would just say forget it, lads; the guidelines ain't coming, not this month, not next month, not under this government. If he did, Mr. Waugh and the credit unions might squawk. We'll bet no one else would.

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When Slow Growth Is Not an Option, Make a Full-Speed Assault

The Globe and Mail, Derek DeCloet, 16 July 2005

Bill Ryan has a little list. He keeps 10 or 15 names on it, each one a competitor he would like to conscript in TD Banknorth Inc.'s march across the northeastern United States.

A small New Jersey-based bank named Hudson United Bancorp has been on Mr. Ryan's list for years. So in March, when he ran into Hudson chief executive officer Ken Neilson at a banking conference at Boston's Langham Hotel, Mr. Ryan delivered the same message he always does: Uncle Bill Wants You!

"I thought it was a great opportunity to say, 'Geez, Ken, if you're ever thinking about combining with a company like us, I'd love to talk to you about it,'" he recalls. "I say this a thousand times a year to probably a thousand different bankers, and generally they'd say, 'Yeah, well, Bill, I'll give you a call some day.'

"[But] Ken said, 'Really, Bill, maybe we should talk more about that.' " So began a four-month campaign of persuasion that culminated in this week's $1.9-billion (U.S.) deal, Banknorth's first since Toronto-Dominion Bank bought control of it in March.

It's the kind of acquisition Mr. Ryan was thinking of when he agreed last year to have TD as Banknorth's parent -- or sugar daddy, if you prefer. What TD offers is money and a big balance sheet. What Hudson offers is a way for Mr. Ryan to break out of the geographic box his bank is in.

Banknorth had decided long ago to stay specialized and shun the fad of some regional banks to turn themselves into financial supermarkets. It's a consumer bank, period: Mr. Ryan has no ambition to branch out into investment banking or other high-profile, high-risk corporate finance work. So growth has to come state-by-state, and bank-by-bank. Banknorth has bought out 26 smaller financial institutions in the past 14 years.

The problem is that Mr. Ryan is running out of things to do in New England. It is already the No. 1 bank by deposits in its home state of Maine, No. 2 in Vermont, No. 3 in New Hampshire and No. 5 in Massachusetts, according to research by National Bank Financial. Mr. Ryan had two alternatives. He could venture south and west, or accept slower growth. For a guy who runs one of America's best-managed firms according to Forbes, option two -- standing pat -- was no option at all.

Hudson had a toehold in New York and Pennsylvania as well as a top-10 market share in Connecticut, all areas of weakness for Banknorth. But, as Mr. Ryan well knew when he chatted up his long-time acquaintance in Boston last spring, Hudson had something else: warts.

Hudson's alleged violation of bank disclosure laws had cost it dearly. It agreed to a $5-million settlement, but was prohibited from buying other banks or opening new branches by the Federal Deposit Insurance Corp. (FDIC) until its internal procedures were brought into line with tougher post-9/11 rules to prevent money laundering.

The headaches compounded some other problems. By some accounts, Hudson had not invested enough in its branches or computer systems -- the basic infrastructure that makes banks efficient. The company was no favourite of Wall Street, and after the FDIC issued its penalty in May, 2004, its stock price stagnated.

But Mr. Ryan knew Hudson was still highly profitable -- he had assigned Steve Boyle, Banknorth's chief financial officer, to track the financial reports and regulatory filings of potential targets. He sensed that the market's negative view might underestimate Hudson's profit potential if it, too, were brought under a stronger parent. At a time when a lot of other banks on Mr. Ryan's list looked expensive, Hudson was the opportunity.

"If this was a bank that was doing everything we were doing, and doing it very well, I would be hard-pressed to show how I could pay a premium for their stock and create value for our shareholders," he says. "My job, from a due diligence standpoint, is not to second-guess what they did in the past but to look at what they could do in the future."

Step one was a series of phone conversations with Mr. Neilson to talk about how the two banks would fit -- "social issues," Mr. Ryan calls them. "You don't talk about numbers. You don't talk about the sale of the company and what price. You talk about whether both of us could feel comfortable that putting our companies together wouldn't tear our companies apart."

He also wanted to gauge the seriousness of the regulatory problems. Hudson, he learned, had hired a former New York banking regulator to work in a new department that dealt with legal issues, including compliance with money laundering rules. Mr. Ryan hit the phones and talked to other bankers who had run afoul of the law, to find out how hard it was to get back on the regulators' good side.

Once satisfied that those problems could be solved, Mr. Ryan brought his finance people in to help solve the hard questions: How clean was Hudson's loan portfolio? Other than the FDIC ruling, why wasn't it growing much? And could Banknorth improve things enough to make a deal work financially?

Mr. Ryan sent a huge staff -- "30 or 40 people" -- to comb through Hudson's back rooms and come up with answers. It quickly became clear to him that some of the repairs would be easy.

For example: Hudson's branches have an average of $30-million in deposits. Banknorth's have more than $50-million. Why? "It's obvious to us that Hudson United was not able to spend as much marketing dollars in marketing themselves as they'd probably like to spend," he said. "We'll give 'em more."

Hudson was trying to make up for its growth problems by cutting corners in other areas, too. Many of their branches close at 3 p.m. "We haven't closed at three o'clock in many, many years," Mr. Ryan says. Fixing his new acquisition "really isn't as difficult as some people are making it out to be."

Biography: Bill Ryan, chairman, Banknorth Group Inc.

61 years old; married; four children, 12 grandchildren
Education: Stonier School of Banking at Rutgers University
Management style: "Roll up the sleeves. [I'm] hands-on with employees."
Best move: Becoming CEO of Peoples Heritage Bank in the early 1990s and helping save it from financial trouble
Worst decision: He once tried to make tellers wear uniforms
Famous for: Driving his Cadillac 50,000 miles a year visiting other bank executives, mostly in the hope they'll sell to Banknorth if they put themselves up for auction some day
Favourite management reading: The Bible

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Merger Fever Grips the US Northeast

TheDeal.com, Peter Moreira and Vipal Monga, 15 July 2005

As TD Banknorth Inc.'s agreement to buy Hudson United Bancorp Inc. raises the specter of Northeastern bank consolidation, shares of Philadelphia-based Sovereign Bancorp Inc. are soaring, thanks not only to the deal, but to a large, disgruntled shareholder.

Even before the unit of Toronto-Dominion Bank announced its $1.9 billion purchase on Tuesday, July 12,, Sovereign shares had been moving because Relational Investors LLC, a corporate governance hedge fund in San Diego that owns 6.5% of the bank, filed a notice with the Securities and Exchange Commission complaining about Sovereign's underperformance and its directors' high pay.

Since Relational Investors filed the papers on July 7, Sovereign's shares have risen almost 10%, accounting for almost all of its 11.5% total return in the past year. The shares Thursday afternoon were trading at $24.70, up 0.9%. Though analysts and bankers say chairman and chief executive Jay Sidhu likely won't be forced into a sale, the Northeastern bank market looks as though it is consolidating, and Sovereign could be involved either as a buyer or seller.

"I would stop short of saying the company [Relational Investors] has put Sovereign in play," said James Ackor, an analyst with RBC Capital Markets. He added, however, the Northeastern bank market does appear ripe for consolidation and Sovereign may have problems because it trades at lower multiples than neighboring banks, meaning it would have trouble using stock to pay for a profitable deal. Sovereign's share price was 11 times forecast 2006 earnings, while other community banks in the Northeast trade at average PE ratios of 13 times.

What Sovereign does have going for it is a superb market, stretching from New Hampshire to Maryland, interrupted only by an absence in New York. The bank, which has a market cap of $8.9 billion, has built a 650-branch network through 30 acquisitions dating to 1989, the most recent being the purchase of Waypoint Financial Corp. in January.

Though Sidhu has achieved an enviable footprint, the constant acquisition charges have suppressed Sovereign's earnings, which is the reason for the low multiples. Though one banker said Sovereign could probably sell for as much as $35 a share to such a bank as Royal Bank of Scotland Group plc or HSBC Holdings plc, Sidhu has consistently declined to entertain the notion of selling.

"In the current environment, we can't find any use of capital more attractive than buying back Sovereign Bank [stock]," said Sovereign spokesman Mark McCollom when asked whether the bank was planning to buy or sell in the near future.

According to a source familiar with Sovereign, Sidhu has missed opportunities to sell the bank and reward shareholders. The source notes that Summit Bancorp offered to buy Sovereign in late 1999, but Sidhu declined the $23 a share bid. Summit was then bought by FleetBoston Financial Corp. in March 2001 for $7 billion, and Fleet itself was bought by Bank of America Corp. in one of the largest bank deals in history.

"How well would shareholders have done if they had sold to Summit?" the source said.

The source said Sidhu, at least for now, has his board in his corner but must address the shareholders' concerns.

Relational Investors' main complaint, according to its proxy statement, is that the bank's nonemployee directors are overpaid, receiving an average of $313,000 in 2004. That's more than directors of any other bank, including Citigroup Inc., which is 27 times as big as Sovereign, said the statement.

McCollom said the bank instituted a 10-year share-based director compensation package in 1996, since which the shares have tripled. Now that the bank is in the 10th year of the program, it is reviewing directors' compensation, he added.

If Sovereign was to seek to do a deal, attractive targets include Brooklyn, N.Y.-based Independence Community Bank Corp. and Lake Success, N.Y.-based Astoria Financial Corp., Ackor said.

The Banknorth-Hudson "deal makes ICBC easier to buy," said one banker, noting that Banknorth CEO William Ryan is interested in moving into metropolitan New York and is originally from Brooklyn.

Bankers added, however, that ICBC chief executive Alan Fishman is also in acquiring mode and the bank could do a deal of its own soon, possibly in New Jersey, because it wants to keep growing and make itself more attractive to potential buyers.

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Little Red Corvette Signals TD's U.S. Strategy

Financial Post, Jason Kirby, 14 July 2005

Somewhere in the New England region served by TD Banknorth Group, one of cchief executive Bill Ryan's employees is cruising the streets in a red-hot Corvette -- a reward for being the company's top-selling employee.

And after scooping up New Jersey-based Hudson United Bancorp. on Tuesday for US$1.9-billion, Mr. Ryan intends to give his new employees the chance to also get behind the wheel in an incentive program as unique as TD Banknorth's boss.

"I don't know how I'm going to do this, but it will certainly be done," Mr. Ryan said in an interview after announcing the deal. "These are the kinds of incentives other banks don't do."

Listening in on the call was Ed Clark, chief executive of Toronto-Dominion Bank, the largest shareholder of TD Banknorth. And his silence -- even as Mr. Ryan breezily chatted about handing out a US$50,000 sportscar while injecting millions to spruce up Hudson United's neglected branches -- indicated Mr. Clark plans to stick to his hands-off strategy for U.S. expansion. TD's foray into the United States is more of a case study of how to grow in that country than a cautionary tale of how not to fail.

To some onlookers, Mr. Clark might have had reason to object to TD Banknorth's purchase of Hudson United when Mr. Ryan brought the idea to him. Hudson United has operated under a cease and desist order related to the money-laundering activities of a division it acquired three years ago. This May, the bank settled with Internal Revenue Service in an investigation dating back to 1998. The bank also has been a dud when it comes to growth.

But the move would solidify TD's position in an affluent region. And if Mr. Ryan is correct, Hudson United can be reinvigorated by introducing a new product line and injecting a more entrepreneurial culture.

In return for granting Mr. Ryan the freedom to fulfill his acquisition goals, Mr. Clark has tapped decades of shoulder rubbing the TD Banknorth executive has done with other regional banks. Mr. Clark says he had considered Hudson United when he was looking for a bank to acquire in New England. Mr. Ryan, though, is far more familiar with Hudson United, having talked with Kenneth Neilson, its CEO, for more than a decade about doing a deal. Finally, with TD's help, he had the capital to follow through.

While the story about Mr. Ryan and the Corvette is flashy, other Canadian banking operations in the United States also offer incentives. Both Bank of Montreal and Royal Bank of Canada retail employees are offered a range of things from cold hard cash to four-day holiday trips. Where their U.S. strategies have hit a snag, though, is in the inability to resist tinkering with their acquisitions, especially RBC which tried to micro-manage Centura.

WIth all of Mr. Clark's recent activity in the United States, other Canadian bankers are no doubt watching TD's progress closely. People who spoke with John Hunkin, the former Canadian Imperial Bank of Commerce chief executive, when he left the job at the end of June, say he has openly admired Mr. Clark's U.S. strategy.

"Hunkin has a lot of respect for what TD's trying to pull off," said one source who spoke with him. "He was quite intrigued by what they are doing. It was like he was saying, 'Gee, we should have done that.' "

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TD Banknorth Buying Hudson United

US$1.9 billion deal extends bank’s reach in U.S. northeast

Investment Executive, 12 July 2005

TD Banknorth Inc., which is now part of TD Bank Finanical Group, is buying Hudson United Bancorp for approximately US$1.9 billion in cash and TD Banknorth stock.

The two firms announced today that they have signed a definitive agreement for TD Banknorth to acquire Hudson United.

“This acquisition is consistent with our growth strategy and will significantly expand our franchise in both Connecticut and eastern New York while providing us with a presence in the fast-growing markets of New Jersey and Philadelphia," said William Ryan, TD Banknorth’s chairman, president and CEO, in a release.

The deal will create a regional financial services company with 590 branches, 751 ATMs and over US$26 billion in deposits across 8 northeastern states.

Two Hudson United directors will be added to the TD Banknorth board of directors.

Under the terms of the agreement, Hudson United shareholders will have the right, subject to proration, to elect to receive cash and/or TD Banknorth common stock, in either case having a value equal to US$21.07 plus the product of 0.7247 times the average closing price of the TD Banknorth common stock during a 10-trading day period ending on the fifth trading day prior to the closing date.

Based on the closing price of the TD Banknorth common stock on July 11, 2005, the deal is valued at US$42.78 per Hudson United share and the aggregate merger consideration consists of approximately 51% stock and 49% cash. It is anticipated that the common stock consideration received in the transaction will be tax-free to Hudson United shareholders.

The cash for the transaction will be financed through TD Banknorth’s sale of approximately 29.6 million shares of TD Banknorth common stock to TD Banknorth’s parent company, TD Bank Financial Group, at a price of US$31.79 per share.

Based on the number of TD Banknorth shares outstanding as of June 30, 2005, TD Bank’s percentage ownership of TD Banknorth will decrease slightly after giving effect to the transaction. However, through TD Banknorth share repurchases or, subject to meeting regulatory requirements, open market purchases, TD has indicated its intent to at least maintain its ownership of TD Banknorth at the level prior to the acquisition of Hudson United or, as market conditions warrant, to potentially increase its position.

“We are pleased to support Bill Ryan and his team in this strategic acquisition,” said Ed Clark, president and CEO of TD Bank. “This transaction delivers on our shared vision for growth and marks a significant milestone in TD Banknorth’s expansion strategy.”

The deal is subject to approval by shareholders of Hudson United and TD Banknorth, as well as regulatory approval, and is expected to close in the first quarter of 2006.

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Here Come the Canadians

Forbes, Liz Moyer, 12 July 2005

Toronto-Dominion Financial Group, the third-largest Canadian bank, continues a major remake south of the border--in the U.S.

After agreeing to sell its TD Waterhouse discount brokerage to Ameritrade Holding for $2.9 billion last month, the holding company for Toronto-Dominion Bank on Tuesday announced a $1.9 billion acquisition of Hudson United Bancorp, a small New Jersey bank that lately has had run-ins with regulators.

Toronto-Dominion has desired a consumer and business banking presence in the U.S., but failed to gain an entry point until March, when it closed a deal to acquire 51% of Portland, Maine's Banknorth. That deal brought it into New England, a hotly contested market where Banknorth has been trumpeting itself as the local community bank optionto big out-of-state banks, such as Bank of America.

But more important for TD Bank and for the newly named TD Banknorth, their partnership meant the potential to push south into the red-hot mid-Atlantic market. TD Banknorth, with the benefit of parent TD Bank's deep pockets, is buying Hudson United at a 15% premium to Hudson's closing stock price Monday, financing the cash portion of the deal by selling some 29 million shares of its stock to TD Bank for $940 million.

"Today's announcement is the right next step" in pursuing our U.S. strategy, said Ed Clark, Toronto Dominion's chief executive, during a conference call.

TD Bank appears to be pursuing a strategy of taking stakes in U.S. companies with the goal of assuming greater ownership later. It will retain 32% of the combined TD Ameritrade once that deal is closed, with the option of acquiring up to 39.9% in the first two years and up to 45% in 10 years.

In acquiring the majority stake of Banknorth for $3.8 billion, TD Bank has the option of acquiring 15.7% more on the open market. After the Hudson United deal it will own 55% of Banknorth, and Clark said on the conference call that he would seek opportunities to continue to acquire more of that company.

TD Bank's U.S. strategy stands apart from those of its big Canadian rivals, Bank of Montreal and Royal Bank of Canada.

Bank of Montreal has for decades owned Chicago-based Harris Bank outright and has been eagerly and aggressively expanding its presence in the Midwest. Royal Bank paid $2.2 billion to acquire Rocky Mount, N.C.-based Centura Banks in 2001 with an eye to expanding in the fast-growth U.S. Southeast.

But where Bank of Montreal has succeeded, Royal Bank has stumbled. Last year, it shook up the management of its RBC Centura unit, wrote down more than $100 million in its U.S .mortgage operations and cut 1,660 jobs.

TD Bank has flirted with U.S. expansion in the past only to shy away. It had a deal to offer banking services through 100 Wal-Mart Stores locations, but cancelled the agreement in 2003 when it failed to overcome regulatory obstacles.

Banknorth gives it a second chance. The company has been an active acquirer itself, with 12 deals in the last 11 years, the biggest of which was a $735 million deal for American Financial Holdings of Connecticut in 2003.

Led by the charismatic Bill Ryan as its chief executive, Banknorth has spread south into Massachusetts and Connecticut. But to achieve his ambitions of growing from a $30 billion asset bank to a $70 billion asset bank (or even bigger), Ryan needed the deeper pockets of a bigger partner.

In selling the majority interest to TD Bank, he said he will have the chance to look at bigger deals than he might have otherwise considered. "That was the rationale for the TD Banknorth combination," he said Tuesday. Without TD, "we would not have been able to structure a 49% cash transaction."

With the addition of Hudson United, which isbased in Mahwah, N.J., TD Banknorth would have $41 billion of assets, $27 billion of deposits and 590 branches. It takes TD Banknorth into the affluent Connecticut suburbs bordering New York and into Philadelphia, New York City and southern New Jersey.

Still, there are some red flags. Hudson United got tripped up by the more stringent reporting requirements of the Bank Secrecy Act and is under scrutiny for its money-laundering controls. It is operating under a cease and desist order by the Federal Deposit Insurance Corp.

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