The Canadians are coming, the Canadians are coming!
Spurred by a strong currency and a mature domestic market lacking in significant growth opportunities, some of Canada's most powerful financial services companies have bulked up with recent acquisitions south of the border. They are not likely to be alone as some of their deep-pocketed competitors are making no bones about following suit when the right deal–or more likely, deals–comes along.
In mid-August, the country's largest bank, Royal Bank of Canada, purchased Atlanta-based Flag Financial Corp. for $456 million U.S. The deal adds 370 employees to the payroll at North Carolina-based RBC Centura, as well as 17 branches and relationships with about 22,000 client households. Its deposit balances increased by about $1.35 billion, or 12%, and its loans portfolio jumped by $1.25 billion, or 10%. Just as importantly, the Flag purchase represents RBC Centura's first acquisition since 2003 and appears to signal renewed confidence in the U.S. market.
Scott Custer, the bank's president, says the U.S. is clearly a place where it wants to grow.
"The southeast is a great market," he observes. Custer says RBC already has a significant market share in Canada and as it looks for places to expand, it's only natural to look across the 49th parallel. "The Canadian market is wonderful. It's just that the U.S. offers great growth opportunities," he explains.
Six weeks earlier before RBC's announcement, Canada's largest insurance company, Great-West Lifeco, acquired the pension plan business from New York-based Metropolitan Life and a pair of its American subsidiaries.
The deal's purchase price wasn't revealed but Lifeco CEO Ray McFeetors says it adds more than 2,600 plans, roughly 300,000 clients, and 225 people, including 80 "relationship managers," to the fold.
He says it will add $7.5 billion in assets to its Denver-based subsidiary, Great-West Life & Annuity Insurance Co. He says this is anything but a one-off deal. It's part of well thought out strategy to grow organically and through acquisitions in both the U.S. and the U.K.
"The place where we have a big need is in the U.S. market," McFeetors says. "We're working on other (acquisitions) all the time. We think there are a lot of opportunities in the U.S. and U.K.," he said.
Dan Richards, president of Strategic Imperatives, a Toronto-based consulting firm to Canada's financial services industry, says it's only logical for companies with aspirations of being substantial players beyond their own borders to expand in the U.S.
He says that Canada's so-called "Big Five" banks–CIBC, RBC Royal Bank, BMO Bank of Montreal, TD Bank, and Scotiabank–are "banging it out" in a relatively slow growth environment in Canada and their desire to merge with each other, a political hot potato that has been on and off the table for nearly a decade, is currently in governmental limbo.
"You've got strong players that are reaching the limits of their growth potential in their home market," he says.
But Richards notes Canadian executives won't be walking around with blank checks as they look to add to their U.S. holdings. He says a profitable business case must be made for all potential acquisitions. "There's a long list of foreign players who have been successful in their home markets, gone to the U.S. and had their heads handed to them on a plate," he says.
Dan Hallett, an industry analyst based in Windsor, Ontario, agrees with Richards. He says the Big Five in particular are so strong in Canada that they have to either look to the U.S. or stagnate. Even with the Canadian dollar having risen about 30% against the U.S. greenback over the last three years or so, most U.S. financial institutions aren't screaming bargains but they have enjoyed a "pretty strong" market in terms of stock prices and fundamentals.
"Generally, there are some good opportunities in the U.S. Valuations are pretty reasonable, certainly more so than they used to be. U.S. companies traditionally were trading at a premium, in part because there were so many big multi-national companies in a bigger market. The last few years have really been a unique environment historically where the Canadian market has become expensive," he says. Hallett says the U.S. market fell "pretty hard" in the aftermath of the tech bubble bursting, but what has surprised more than a few industry watchers is how slow it's been to recover.
"The swings tend to be a little wider in both directions. That hasn't happened here. A lot of the companies are very strong but the valuations haven't reflected the past five or six years of continued profitability and cash flow generation. If you incorporate currency into that, [the U.S. market] really hasn't done anything," he says.
Paul Bates, former CEO of Charles Schwab Canada, has a different take on the situation. He says the U.S. financial services sector is desirable because it's highly diversified and isn't dominated by a small number of players as Canada's market is. Making American companies even more attractive is the fact the accounting and regulatory systems in both countries are very close, many of the same securities are traded on both sides of the border and the U.S. market is very well known to Canadian firms and investors alike.
"There are literally thousands of banking institutions in the U.S. and a multiple of that in investment firms. They range from brokerage firms to niche specialists that deal in municipal bond offerings, for example. If you want to do a deal in Boca Raton, there's probably a deal to be done with an independent company there," he says.
Bates says any time a foreign player increases its presence in a particular market, opportunities usually follow quickly behind. For example, he says U.S. advisors working at the acquisition targets of Canadian firms should have greater access to securities markets north of the border once a deal is consummated.
For some advisors already thinking about making a change, new ownership, particularly foreign ownership, can often be the trigger to move elsewhere and Bates' advice is to "hold your horses."
"There may be opportunities you haven't perceived yet. Heft of any kind usually brings greater job security and new opportunities," he says.
