Assessing The Early Success of TD’s Acquisition of Cowen

SPEAKER: Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

LARRY WIESENECK: Hi everyone, I’m Larry Wieseneck, Co-Head of Global Investment Banking at TD Securities. Welcome to our podcast, we’re recording on April 28th, 2023, two months after the close of our acquisition by TD Bank. And it’s my pleasure to be joined today by my new partner, Tim Wiggan, the other Co-Head of Global Investment Banking. Welcome, Tim.

TIM WIGGAN: Thanks very much Larry, it’s a real pleasure to be here. I’ve already been introduced, my name’s Tim Wiggan, I’m 23 years at TD Securities and two months in to partnering with you, Larry. I’m very much enjoying the experience thus far and looking forward to building a great dealer and investment bank together.

LARRY WIESENECK: As always, also here, my good friend and former colleague, David Erickson, Senior Fellow at The Wharton Business School. David, let me turn over the [inaudible 00:01:14] to you.

DAVID ERICKSON: Thanks Larry and Tim, so I guess we’ll start with your transaction because you guys are used to advising companies on M&A, and you experienced your own merger, you’re now walking in the shoes of your clients. What are some of the things that you’ve learned in your own transaction and integration thus far? And in particular, how important are the quantitative elements such as revenue or cost synergies relative to the people and cultural issues? Tim, why don’t I start with you to get your perspective on that?

TIM WIGGAN: Yes, thanks very much, David. So I would say there’s a couple of things and I like the way that you’ve broken it down between quantitative and qualitative, so maybe start with quantitative. In my mind, in order to have a successful transaction, you need to have discipline and some purpose. So in other words, what is it that you are trying to accomplish through the transaction? So for us, I would say that process really started with a body of work, which we called Playbook, which kicked off in during the pandemic, which was really an effort led by my predecessor, longtime friend and partner Rob Pryde, to identify where we wanted to take TD Securities. There were a number of outcomes from that work, but one of the key outcomes that were identified was the fact that we needed to be larger in the US in order to continue to grow.

We had been growing what we called our US dollar strategy, lots of great people leading that, but it tended to be more aligned with balance sheet related businesses. So that could be fixed income, FX, but also equity derivatives and prime. So really Playbook identified the need to add human capital, sales, trading, research and of course investment banking and advisory, so that was the purpose, if you will. We started out and literally built a checklist of areas that we wanted to fill in that were existing gaps. Then I would say we went through a process of looking at the actual activities, in this case within Cowen to see what the fit was. Clearly identified areas where I think we mutually agreed there wasn’t necessarily a good fit, and also had a very sharp lens on risk and controls within the bank, within a G-SIB bank.

Goes without saying, price and you have to obviously arrive at a price that is good for both sides and recognizes the tremendous value, in this case that was built up in Cowen. So maybe that gives you a bit of a sense of the quantitative, really have to stress the importance of qualitative people, people, people. I think that despite all the advancements in our business and society generally people remain our competitive advantage and our differentiator, they’re critical to retention, they’re critical for hiring and for attracting talent. So one of the things that I personally enjoyed in the process working with Larry and Dan and Jeff and others, was the amount of time that we spent together prior to formal due diligence, getting to know one another, and clearly that started initially with the, I think the first meeting that happened in January of 22 with Riaz, Rob Pryde and Jeff, and then soon after with a bigger group.

So having that time and getting to know each other really helped when the deal closed on March 1, we weren’t coming in blind, we had a high level understanding of what people were about and some of the things they were looking to accomplish.

DAVID ERICKSON: Larry, how about from your perspective?

LARRY WIESENECK: Well, just jumping off of what Tim said, and maybe it’s almost the flip side, not only as an advisor to your point earlier, but even for [inaudible 00:05:33] firm, we’ve done a lot of acquisitions, so we’ve been in the seat that Tim and my now new colleagues have been in looking at us. But selling the firm is a different story, so I’ll maybe walk through it from our standpoint as someone who was acquired. There’s no question that the cultural issues were a huge element. What we saw in TD was someone who was extraordinarily culturally aligned, Tim and his partners did a phenomenal job explaining the industrial logic to us of the deal. Such a good job that I think I could now articulate to an external party just as well as any of the folks that came from TD Securities, how well the businesses fit together, because the work they had done, going back to the original strategy was so well-thought-out.

That got us interested to come to the table, but what motivated us that this would be a place where we could deliver for our clients and for our colleagues, that I’ll come back to in a second, is the way they show up at work every day. And the best way of describing that is culture, and in particular I think we share on the four Cs, as I think of it, the four Cs are most important in running a business like ours. I think we share very similar attributes, and in my mind the four Cs are clients, community, colleagues and capital. And in all four, even though we couldn’t be more different in size, right? TD’s roughly a hundred thousand people, the old Cowen was roughly 1,500. We had very little capital and TD’s one of the biggest most well capitalized banks in the world.

Enormous focus on clients, the commitment to community at both firms is palpable. In both of our principles, we talk about the responsibilities we have to our local and our global communities. We both spend enormous amount of energy on the colleague experience and making sure that this is a place that people want to work at for the long term. And then finally, both organizations, again different sizes, but both organizations view themselves as stewards of capital or let’s say we think like owners. And so when organizations that might be very different in scale have similar ethos, it makes coming to the conclusion that this is something worth doing much, much easier. So David, I would say the lessons for clients is there are lots of opportunities to do financial engineering. There are lots of opportunities to come up with industrial logic where organizations could on paper make sense together, but for it to work, the qualitative ones become the deciding factors. And the last thing I’d say, I’m not speaking out of school here, it’s disclosed in the proxies, et cetera.

There were other financial institutions that came knocking, none of them were as compelling on the cultural side such that we could say one plus one will equal more than two because they ran their businesses differently than TD did. What we found in TD was someone that we really thought we could grow a great business together, so that would be kind of my perspective on it. The only other thing I’d say that has nothing to do with the lead up to the deal, but gets to the last nine months from when the deal was announced to closing and then since then, bankers usually after the deal’s negotiated, they get to walk away and then they might have a few things to do after that, but then they wait for clearance from DOJ, [inaudible 00:09:13], and then the deal closes.

When you go through it as a principle, there’s an enormous amount of work that goes into, particularly in a people business like ours on both sides, getting folks to understand that there’s limitations of what you can do together up until the deal closes. You have to run the businesses separately, then get ready to start working and running the business on a collective basis post close. I think going through it in this matter, I have a new appreciation for the challenges our public companies go through in that period between deal announcement and close. I didn’t understand viscerally what they have to go through as managers in that period, and now I do.

DAVID ERICKSON: So why don’t we shift to the first of your four Cs, the clients. For those companies that have been longtime Cowen clients, Larry, what additional capabilities does this bring to them? And what have you heard already in the brief period of time that you guys have been together?

LARRY WIESENECK: The standard answers that you’d get from someone coming from an independent advisory investment banking world, joining forces with a large universal bank would be things, and these are all true, the opportunity to provide capital maybe in support of deals, potentially being a partner in their regular way financing, those certainly have already shown up in terms of opportunities. Some of our clients, we didn’t have an investment grade debt business, certainly it’s a big business at Barclays and we were able to deliver that to our clients. But I think that if you pull back the excitement and the energy comes around from being able to be a more holistic advisor and to move from being one of the trusted advisors to hopefully the inner circle advisor. And one way that I can share on that was in the days around the challenges last month in the regional bank space.

We had a number of clients, we have a very big practice in healthcare and technology, and many of the companies in that industry, particularly the venture backed ones, had either their primary or their sole relationship with SVB. And we would’ve had very limited ability to hold their hands if we were still independent. With the benefit of the broader reach of TD Bank, including our partners that are outside of TD Securities, but rather in the commercial and retail bank. We had dozens of clients that we could help them understand first simple things like what does FDIC insurance mean? What happens to your accounts? If they wanted to move money or diversify, we will open up accounts for them. And I can tell you that never once when we were thinking about this deal did we start thinking about cash management solutions that people would need in a moment of significant concern for their board or for their investors, but we were able to do that for them.

And that was a tangible change we could never have done before that, again, as you know from your time in the industry, if you can be there for a client in their most challenging moments, you win a client for life. And so that’s the first thing that comes to my mind.

DAVID ERICKSON: So similarly, Tim, from your perspective, for longtime TD clients, what additional capabilities does this acquisition of Cowen bring? And what have you already heard from your clients?

TIM WIGGAN: Yeah, I would pick up on Larry’s point, he used the word holistic. I think that if you look at TD Securities, I like to say that we have a relationship model, much like Cowen, we truly roll up our sleeves and make an effort to get very close to our clients and try to help them, a solution whatever it is they are looking to accomplish in the market. And as I described in our initial conversation, we were just tilted specifically in the US more towards balance sheet businesses and away from equity, sales, trading and research and as well as advisory. And so it really had an impact for us specifically as let’s say our core Canadian clients look to access US markets. I think maybe a tangible example of that would’ve been 2021, which was really the last meaningfully robust equity capital market we’ve had globally and certainly in Canada and the US. In that year, 15 of the largest 25 Canadian ECM mandates required cross-border distribution and we just weren’t seen as being able to provide the same level of service despite very strong relationships relative to some of our competitors.

So in a word, I would say there’s a tremendous amount of excitement. Last week, Larry and I were in Pebble Beach, we host an annual client event, there were 30 of our top clients there. And there was just a visible excitement on the part of these business leaders across a wide variety of different industries to learn more from Larry about the opportunities that are at the table. And we’ve had some wins, there’s not been many IPOs globally, one of the IPOs in Canada was Lithium Royalty Corp, where we were a junior book runner and the analyst on the company is an existing Cowen analyst.

There’s been a number of wins as well that hopefully we’ll be ready for primetime soon across a wide variety of different areas of the firm, including securitization, corporate banking, M&A, and then a healthy backlog of IPO opportunities as well. So I think two months in, we’re seeing real tangible results where the teams have come together and basically gone out and met clients and brought forward solutions. So it’s exciting, it’s going to be a busy couple of years, but we’re definitely seeing the start.

LARRY WIESENECK: And David, if it’s okay, one of the… what Tim just said reminds me of is being at the event at Pebble, what I hadn’t anticipated, but it goes back to the client component of my four Cs. I had clients that, yeah, they wanted to hear what we were going to provide, but they were trying to convince me of what a great institution TD was because of their 25 or 30 year relationship with the bank. And I think that that just gave me another jolt of energy regarding the value and similarity of our cultures because that kind of long-standing relationship and partnership that many of these clients feel with TD Securities is reminiscent of the way many of our clients from TD Cowen feel about our bankers, our commitment to them, so it’s been a really good first two months.

DAVID ERICKSON: Larry, you and I had a conversation about a month ago, or our most recent podcast where we talked about in the wake of really what happened with the collapse of Silicon Valley Bank and then the rescuing of Credit Suisse. And so now it seemed like things were moving along okay, until earlier this week when First Republic announced their first quarter. And ever since the stock has continued to struggle and now there’s obviously very big concerns about what’s the ultimate outcome for First Republic Bank. The question now is do we think there’s going to be further ripples in the coming months? And how do you both see that unfolding in the near term?

LARRY WIESENECK: I’ll take a first shot at that, I think like any kind of exogenous event that changes the equilibrium, you can look at other physical forms to see analogies. And you can think of it as when a volcano erupts and what happens in the aftermath, you can think about an earthquake and then after the earthquake you’re going to have trembles days later, maybe weeks later. And I think you have to look at that the same way when you have an event like in a very short period, SVB, Signature, Credit Suisse, which is, it could be months before we’ve seen a bunch of the aftermaths from this work its way through the system because analysts do more work on other names, the regulators look at do they make changes? And we’re going to have that work its way through. But do I think that the worst of the information is out in the market now? I think it is.

I think if you think very narrowly in terms of what it means for the depositors, et cetera, at this point, every corporation that might have been caught a little bit short in terms of the way they were organized in their corporate cash and didn’t have diversification, that’s done, they found ways to move it, it’s not going to have the same impact on those companies next time. Retail investors are smarter about everything from what’s insured? What’s not insured? Money market accounts, et cetera, so I do think that we’re retreating from that challenge.

I also look at [inaudible 00:19:10], if you look at the VIX, very quietly during this period, while we had a spike at the time of the events in early March, the VIX is now down into the mid-teens. Long term, that’s not always a great thing, from a standpoint of being able to finance companies, that’s actually a good thing because we’ve been running, as David, you and I were talking about before for most of twenty… call it 22 into early 23, we had the VIX somewhere in mid-twenties or higher. Really, really hard for companies to make decisions and for investors to make decisions when volatility is north of low twenties.

So what does that mean? We’re seeing the backlog building again, we’re seeing people thinking about doing deals and I think that we get through another month or so and it’ll be a decent market. Which will be decent is an upgrade from a very poor market for capital formation, for equity issuance, and even for M&A into the second half of the year. That would be kind of my gut, but it won’t be without some bumps along the way because I do think we’re still working through the aftermath, Tim.

TIM WIGGAN: Yeah, I absolutely feel there will be continued ripples, I think the regional banking crisis that we saw was a case of duration mismanagement and clearly an imbalance between the liability and asset side of the balance sheet. I think that we’re living through a great economic and monetary policy experiment and we’ve had some dramatic activity including a spike in inflation above 8% and the central bank response to that, the Fed raising rates over 450 basis points. So I don’t think that we’re through this, one of the things that I focus on is we’ve gone through the duration mismanagement. Could we have a liquidity mismatch? We’ve had an explosive growth in private and alternative assets. I was looking earlier this week at the growth of AUM in private equity, it’s up fourfold in the last decade. So my question is, so how does that look in an environment where interest rates aren’t declining and multiples aren’t expanding and maybe lending is just a little bit tighter? In my mind, what we saw in the gilt market in the UK was maybe an example of how this plays out.

It was an example of liability driven investing, so simplistically you have your return seeking and your liability matching assets. The idea in this case, your liability matching assets are gilt, you lever them up, and I think a lot of that money found its way into private and any liquid assets. Obviously you have a budget issue and the market revolts and everyone’s scrambling for liquidity. So I think that those type of examples we need to watch very, very closely. Another one is the commercial and the commercial real estate side where we’ve got something like four and a half trillion dollars of loans outstanding, about a third of them coming due before 2025 and have to be refinanced. So how does that look? So I think that there will be other kind of flash points of crisis along the way that we’ll need to monitor, but I by no means think we’re through this at all.

DAVID ERICKSON: So in the interest of time, I’m going to kind of close out with kind of two combined questions if you will. Again, it goes back to a month ago, it was kind of an unsettling time for the markets broadly. Since that time we’ve seen a couple of M&A deals actually get announced and a couple of IPOs in the process of either roadshow or recently completed transactions. Do you see that as part of the start of a trend? Or are we going to be a couple of months down the road still waiting for that trend to start? And if so, this is the second part of the question, if so, what’s the advice to TD Cowen clients? Tim, why don’t I start with you and then I’ll flip it to Larry?

TIM WIGGAN: We’ve definitely seen more activity in the M&A space, I know you mentioned [inaudible 00:23:48] in Canada. We had a deal this week as well on the energy side that is publicly disclosed with Total selling their oil sands assets to Suncor in a $4 billion transaction. So I think a couple of things have to continue to occur, one is obviously a thawing of lending markets and generally, which hopefully we’re starting to see not notwithstanding all the turbulence that Larry and I talked about earlier. And then you need a reasonable balance in terms of clearing price. So I think for quite a lengthy period of time, we not only had funding markets challenged, but maybe a bit of a disconnect between the sell side reality on price and the buy side, so maybe a bit more normalization there.

I also think if debt capital markets and equity capital markets are generally more challenged, it would make sense for companies to go after operating synergies and look for M&A opportunity. And in terms of advice, I think Larry and I have both spoken about a theme of potential ripples or turbulence in the marketplace, so I think that what we’ve seen in the last number of months highlights the importance of capital liquidity funding and real discipline around your risk and controls. Clearly there are major macro forces at play that led to some of these difficult events and outcomes, but as well there’s a fair amount of self-reflection needed in terms of what maybe could have been different, done differently as it relates to some of those key [inaudible 00:25:37] of running any company, public or private.

LARRY WIESENECK: I’m not going to answer on the M&A fronts, I think you’ve already gotten that from Tim, we definitely agree. And in terms of starting to see larger deals come to market, a theme, David, that we’ve talked about before is most of the deals strategically fit into the [inaudible 00:25:57] or this bucket of fit and focus. And that’s what you expect to see in difficult times, companies questioning their portfolio, trying to modify it to be more appropriate for the cycle ahead. And I think that will pick up, that gets into are there synergies? Better ways of running those businesses? Et cetera. Going to the capital markets, I do think we’re at the beginning of seeing some of the most beaten up sectors. The companies capitulating and realizing that since capital, certainly financing is their lifeblood, it’s their oxygen, they’ve held their breath long enough, they didn’t like the declines in their stocks, they had the rear-view mirror, which basically said, that was worth 50% more say a year ago, whatever.

But now the answer is if they don’t start to bring in the needed capital that they may not be a tomorrow, right? And so we’re seeing both buyers and sellers, so trying to figure out how to make that work. We’ve seen in a significant uptick certainly in our backlog in those spaces, we’re seeing deals get done, they tend to… the early deals getting done are generally existing public companies raising capital either through a private, a convertible, maybe an overnight deal where they first line up investors in the private market, then flip to the public market, but the early stages of recovery in terms of issuance is out there and the question is will that continue? But we’re seeing it first and foremost in the sectors that traded off the most, right?

So healthcare, some parts of technology, those are also the spaces that sold off earliest in or before the tightening from the Fed, so we’ll monitor that. What we tell clients there is if in order for you to be able to run the business the way you want to, you need to have more capital on hand, you have to be price [inaudible 00:28:09] sensitive because you can’t take the risk of getting to two months, three months, six months away of running out of your runway. So I think that that is probably the number one conversation we have with folks is on that front. If it’s in the growth where folks who need more capital and then on the large cap side it’s around portfolio and how you basically remake your portfolio in order to be in the strongest position for the next part of the cycle that we’re… whether that’s six months away, 12, 18 months, clearly there’ll be a leg up at some point over the horizon.

DAVID ERICKSON: That’s great, Larry and Tim, thank you for the time, I’ll turn it over to you guys for closing comments.

LARRY WIESENECK: Well, first I just want to thank again my new partner, Tim for joining, we have a lot of fun on these podcasts. And Tim, I’ll let you be the judge as to whether it was fun or not, but hopefully we’ll be doing this again soon. And since we are running out of time, David, thank you once again, always appreciate these conversations and I look forward to the next one, thanks.

TIM WIGGAN: Yeah, I would just say Larry, David, thank you very much, it was fun, I did enjoy it and I thought the questions were great, so thanks for having me.

SPEAKER: Thanks for joining us, stay tuned for the next episode of TD Cowen Insights.

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