Banking: Ready to rumble

Bay Street mergers are seldom easy, but Canaccord's Paul Reynolds and David Kassie of Genuity say they're set to take on their biggest rivals (not each other).

At least a few eyebrows raised in March when Canaccord Financial CEO Paul Reynolds struck a $286-million deal to acquire Genuity Capital Markets, David Kassie’s closely held investment bank. After all, smooth honeymoons are not the norm for financial marriages, which typically involve egos as large as the related transaction prices.

According to analysts, there is a lot to like about this cash-and-stock deal, but there is also execution risk. “Canaccord’s acquisition of Boston’s Adam Harkness didn’t get off to a positive start,” says one industry watcher. “And a lot of industry people think there will be plenty of discord at the morning meetings with Genuity involved. The Genuity guys have a reputation for being very aggressive, more so than on the Canaccord side. Canaccord has also focused on growth stories. That’s their story. And Genuity has a different base of larger-cap clients. That means little overlap, which is good for any merger. But it also means different cultures. The cynical view is that Genuity sold out to a lower-quality competitor instead of doing an IPO. So some people see Kassie and crew looking for an out.”

Another Bay Street insider says Reynolds’s decision to invite “Kassie’s stable of cowboys into Canaccord’s public corral could result in a reverse takeover.”

Reputational risk is also a factor. Under Reynolds’s steady stewardship, Canaccord – which posted $478 million in revenue for its fiscal 2009 period – is nothing like what insiders fondly call “the Vancouver bucket shop of yesteryear.” But it took a serious PR hit from the asset-backed commercial paper fiasco. And Genuity was born out of a string of controversial deals and blunders at the Canadian Imperial Bank of Commerce, including one that resulted in a US$2.4-billion payout to Enron investors.

Kassie, a former head of CIBC World Markets who was expected to eventually take CIBC’s throne, was tossed overboard in 2004. Shortly after, Genuity was conceived around his picnic table, and it became a magnet for deal-making talent. After a string of embarrassing defections, CIBC sued, claiming Genuity was poaching. Kassie fired back with a wrongful-dismissal action. According to Street humour, the ongoing litigation will last as long as the Peloponnesian War.

Critics predicted Genuity would fail, which is why the Canaccord acquisition is seen by some as vindication for Kassie’s career. But the man doesn’t need to prove himself. He is widely respected, even by former CIBC executives who did not follow him to Genuity. “I have enormous respect for David Kassie,” says Don Lindsay, CEO of Teck Cominco and former president of CIBC World

Markets, adding it wouldn’t be appropriate to comment more “until the CIBC lawsuit is settled.”

Furthermore, after Kassie left CIBC, the bank’s reputational hiccups didn’t stop, while Genuity quickly attracted big-name clients. “David was on my board, and I know him well as a director,” says Michael MacMillan, former head of Alliance Atlantis. “But I also know him as an investment banker who really understood business and economics. I’ve used various firms over the years, and all have had pros and cons. But Alliance had terrific experiences with Genuity. The fact that it was a new firm didn’t bother us. We knew David and his track record. Bob’s your uncle. There is not much more to say.”

Since its inception, Kassie’s firm – which generated about $100 million in revenue in its last fiscal year – has grown itself into a top-notch M&A shop. And that could be exactly what Reynolds needs to achieve what he calls “Canaccord’s global ambitions.”

The day before shareholders voted 99.8% in favour of the merger, Canadian Business sat down for an exclusive interview with the power brokers behind Bay Street’s most recent high-profile partnership to discuss the deal, investment banking, the economy and life on the Street.

CB: How did this deal come to pass?
Paul Reynolds: Canaccord is always looking for ways to grow its business. We look for opportunities in the U.S. We look for them in the U.K. And we look in Canada. David and I had a merger talk about 2? years ago, but the financial crisis hit, and a deal didn’t work for either of us at that time. We got together for another talk late last year. It was prompted by Canaccord. We saw an opportunity to buy an M&A business at the right time, the low end of the cycle.

CB What was the driving factor?
David Kassie: When Paul called, Genuity was coming up on its fifth anniversary. Our partners’ committee had already had a strategic offsite to discuss the next five years. In addition to thinking about going public, we were thinking about exploring strategic options, but with nothing on the radar. Nobody was looking to cash in and exit the business. After talking to Canaccord, we benchmarked the merger opportunity with an IPO and saw a larger and better platform to grow more rapidly. The other thing was Canaccord’s indigenous U.K. businesses, its indigenous U.S. business and its retail business, none of which Genuity had. We felt our capabilities and senior management skills could help add value to these businesses. Frankly, I don’t think they are represented in the Canaccord share price, but they have been improved quite a bit by Canaccord, and they look to be at, or close to, the inflection point, when they could add serious value. So we felt that this was a really good opportunity.
PR: For us, the main genesis, really, is that Genuity is great at things in which Canaccord lacks a lot of expertise and vice versa. Canaccord is a prolific underwriter, and most of our business, over 70%, comes out of that revenue engine. At Genuity, over 70% of what they do comes out of M&A and advisory skill sets. Putting our firms together creates one of the top, if not the top, investment banks in the country. We are now clearly the No. 1 independent in Canada. No. 1 in M&A, restructuring and equity underwriting. This merger puts us in direct competition with the major banks.

CB: You both have run organizations that have been caught up, rightly or wrongly, in reputation-threatening media storms. Did that create any merger concerns?
PR: I don’t see any negatives in David’s past. He has an impeccable reputation and is one of the industry’s most trustworthy and bankable names. As for Canaccord and ABCP, it happened the week I took over as CEO. I came from the capital markets business and didn’t know much about commercial paper. I had to come up to speed. Clients that held ABCP walked out in a good position. We put them first. Commercial paper cost our internal and external shareholders a lot of money. But we did the right thing.

CB: Is a chairman role really meaty enough for David Kassie?
DK: I won’t just be chairing the board. The title is group chairman, and it is a full-time executive role. I’ll be working with Paul and the rest of team on strategy and clients and generating revenue.
PR: The big advantage of independent firms is the flat structure. We operate like a partnership. David will be in the office every day and we expect him to be a big producer.

CB: Is there a threat that some top Genuity people will bide time until they can cash out?
PR: Their stock vests over a five-year period, and the senior guys are tied up for about eight years, so they’re at Canaccord for a long time. David and his partners also didn’t get what they thought Genuity was worth, or what our independent advisers said they’d get in an IPO. They took a discount because they are entrepreneurial. They want to take Canaccord shares to a much higher place.
DK: With approximately 50 partners, the equity in Genuity was pretty broadly held. So for the most part, I don’t think anybody has realized career-ending ambitions. That said, I have a sense of what motivates my partners. And they are not working just for money. That’s clearly part of it. But they enjoy what they do. They like working together. They like serving clients. They like building a business and competing. That’s why they do what they do. So I think people at the combined firm will be pretty motivated for a long time. I’m motivated and energized myself.

CB: No two firms are a perfect match. What are the expected challenges?
PR: At Canaccord, we’ve always said any merger would have to be a strong strategic fit, a strong cultural fit and accretive to earnings right out of the gate. This deal is all three. Both firms are producer-driven, so we don’t have huge layers of management. Everybody at both firms is involved in all aspects of the business, so we are a good cultural fit. It’s been tough departing with some good partners, who have been replaced by Genuity people who fit better going forward. But the two businesses are so different that redundancies are minimal. With this deal, the big synergies are not in cost savings, which are over $9 million. This is about revenue gained from combining an equity underwriting and distribution firm with an M&A advisory firm.
DK: On the surface, you might expect cultural challenges integrating an M&A culture with an underwriting culture. But we see an attractive and very complementary fit. Most of Genuity’s partners worked on larger platforms prior to joining the firm. They’re used to having prolific underwriting prowess and broader distribution capabilities. So we’re delighted to have more arrows in the quiver.

CB: So no cultural differences? Not even Ki restaurant v. Bymark?
PR: Actually, our favourite restaurants do match. Canaccord and Genuity are a very similar deal. And we’ve been very good at integrating businesses. We have domestic operations in Canada, the U.S. and the U.K. And we make them work together very well. I don’t think putting together like-minded teams in Canada will be as difficult as making that broader group work well together.

CB: Other banking acquisitions have become reverse takeovers. Is that a concern?
PR: I don’t have any concerns with this transaction. There are an equal number of senior people from each firm in senior Canadian roles. My CEO role doesn’t change. Obviously, I am happy about that. Mark Maybank, our chief operating officer, stays in his role. Brad Kotush, our chief financial officer, stays in his role. But the key is culture. Genuity and Canaccord are both partnership cultures. I don’t see a reverse takeover happening. I see a new group of like-minded partners. And they have the same goals as I have, which is to improve the efficiencies and profitability of Canaccord and take the stock to much higher multiples for internal and external shareholders.
DK: Investment banks are a people business. And it is very rare for a firm to have too much talent. The shortcoming is usually that you don’t have enough. So should too much talent be a problem, it would be an extraordinarily high-class problem and one that usually doesn’t occur.

CB: Now that the financial crisis appears to have passed, will Corporate Canada be more or less likely to turn to an independent dealer for investment advice?
PR: I think we are very well positioned. Some of the larger banks put a lot of selling pressure on their clients during the downturn, and there will be some backlash against them as things recover and debt becomes more available.
DK: My experience is clients makes decisions based on what’s required. And the winners are usually the ones with the best ideas, execution, products and advice.

CB: With government and consumer balance sheets being what they are, how do you see the Canadian and global economies performing over the near term as interest rates rise and government stimulus stops?
PR: My view is that rates are going to remain pretty unchanged for the balance of this year. There are very conflicting views, but that’s my personal one. I think rates will stay low longer than people think and that the economy will be able to absorb the small rate hikes I see over the next 18 months.
DK: The local economy has been doing relatively well compared to the U.S. And I think that will continue to be the case. It is one of the few times in my 30-year career that Canada is definitely in vogue internationally. We should have a reasonably good capital market, certainly relative to other markets.

CB: Where will the big-money deals come from in the near term?
PR: A vast array of sectors and industries. I think mining might cool off a bit over the next six to 12 months. Related commodity prices might have run a bit hard. But I am very bullish on energy and business in the U.S., especially in life sciences and technology.

CB: What are the hidden, or lesser known, threats to the recovery?
PR: For the financial industry, the biggest threat is over-regulation. There are going to be a lot of regulatory changes, although probably more so in the U.S. and U.K. than Canada. But that could create an opportunity for us. Some major institutions may have to divest assets, and Canaccord with Genuity is a larger more profitable firm that could make acquisitions to grow our businesses. It may not happen. But there could be some great opportunities.

CB: What does it take to succeed as an investment banker today?
DK: With technological innovation, day-to-day details have changed over the years. But fundamentals to success have not. Success is about being creative, putting clients first, problem-solving and having value-added ideas.
PR: I started as a trader, then I was a private client broker, then I was in institutional sales, then investment banking, then a chief operating officer, and now I am a CEO. Every job needed a different skill set. But the common required thing was hard work. Put your clients first and work hard and you can succeed in this sector.

CB: How has the industry changed?
DK: When I started, it was all about the client. For Genuity and Canaccord, it still is. But on Wall Street and elsewhere around the world, including Canada, you can have such big balance sheets, and such large firms, with such large conflicts of interest, that it is not about just serving the client anymore. And when you have the largest firms generating so much of their profits from other activities, it is really hard to put the client first. You are constantly in conflict, even if people are well meaning.

CB: What are your thoughts about the SEC allegations against Goldman Sachs?
DK: No comment.
PR: I have no answer on that.

CB: What’s the biggest public misconception about investment banking?
PR: We don’t have investment bankers getting paid hundreds of millions of dollars. It just doesn’t happen in Canada.

CB: How do you start the day?
PR: My day will change because I am moving to Toronto. But working out of Vancouver, I get up at 4:45 a.m. and check my Blackberry to see daily comments out of the U.K. I have a shower, then look at Toronto notes and e-mails before driving to work. I arrive between 6 a.m. and 6:30 a.m. I talk to partners in the U.K. and out east, then move on to clients. We are a producer-led firm, so I don’t sit around having coffee.
DK: I read Canadian Business.