Noah Zivitz

Managing Editor, BNN Bloomberg

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Toronto-Dominion Bank announced Tuesday morning that it has agreed to buy Cowen Inc. in its latest U.S. takeover — and some analysts warned TD could be hard pressed to hang on to Cowen’s most valuable talent.

Under the terms of the deal, TD will pay US$1.3 billion, or US$39 per share, in cash to buy the New York-based investment bank. TD said it sold 28.4 million shares in The Charles Schwab Corp. to finance the transaction; as a result, TD said the deal will be neutral to its Common Equity Tier 1 capital ratio.

"Cowen is a leading independent dealer with a premier U.S. equities business and a strong, diversified investment bank that, when combined with TD Securities, will allow us to accelerate our strategic U.S. growth plans," said TD President and Chief Executive Officer Bharat Masrani in a release.

The deal has been a source of speculation for weeks, after Bloomberg News reported in early July that talks were underway. 

Paul Harris, a partner and portfolio manager at Toronto-based Harris Douglas Asset Management, said the scale of TD’s investment banking ambitions in the U.S. will go a long way in determining the success of the Cowen deal.

“Is this really a deal to help their existing client base grow and help them with investment banking, and corporate finance, etcetera? Is that the goal? Or is the goal to say we want to be a big investment bank in the United States? And I think if that's the case, I think that'll be very difficult. … And so if you're going to compete with Goldman (Sachs), I think this would be a very bad thing, or with Morgan Stanley or JP Morgan.”

Harris, whose firm owns shares in TD, added the Cowen deal would probably “look terrible” in a few years if TD has any intent of trying to compete with those Wall Street giants.

TD said the purchase of Cowen will “modestly” boost its fiscal 2023 adjusted earnings per share, and that it’s expecting up to US$450 million in pre-tax integration and retention costs over a three-year period. The transaction, which TD said is expected to close in the first quarter of next year, is subject to regulatory approvals in Canada and the United States, as well as a vote by Cowen shareholders.

“The reality is that by selling down its Schwab stake, [TD] is simply trading some U.S. wealth exposure for U.S. capital market exposure. The diversification inherent in that trade is not necessarily a bad thing, although we note that the market generally prefers wealth to capital markets especially coming off of a historic M&A cycle. On top of that, the track record of successful cross-border capital markets acquisitions is small, with retention of people being the key obstacle over the medium to long term,” wrote Meny Grauman, an analyst at Scotia Capital, in a note to clients.

The issue of talent retention is particularly sensitive in the investment banking sector, warned Adam Dean, the founder of Dean Executive Search, who previously served as chief of staff to CIBC’s vice-chairman after earlier having roles within CIBC Capital Markets.

“In investment banking — whether it's focused on equity capital markets, or the broader M&A teams beyond that and coverage teams — it's a very transactional business; and, as such, individuals within it can tend to be quite transactional themselves. And as a consequence, the view of the future can be paved forward with gold, and if they think that there's broader opportunities for them with more money on different platforms, then that's a risk that all investment banks face.”
Dean pointed out, however, that TD and Cowen likely did themselves a favour with staff retention by appointing Cowen’s chair and chief executive, Jeffrey Solomon, to the senior leadership team of TD Securities.  

Cowen is the second major U.S. takeover that TD has revealed this year. In February, the Canadian bank announced it agreed to buy Memphis-based First Horizon Corp. for US$13.4 billion. That deal is still awaiting final regulatory approvals.