Wacky times present unique opportunities

If it is good enough for Bank of America’s (BAC:NYSE) Ken Lewis, it is good enough for Canada’s CEOs. I know the last “Big Idea” didn’t get any traction (see prior post “Put Citigroup out of its misery” June 26-08), but it is time to put the thinking caps on again. To whit:

– Morgan Stanley’s market cap. is sitting at US$20 billion
– Goldman Sachs’ market cap is at US$40 billion, and the A-rated 2031 sub debt is trading at 79 cents on the dollar

Although Goldman professes no interest in marrying with a commercial bank, Morgan Stanley’s CFO is being more pragmatic, according to one interview:

“We have to be adaptable,” said Morgan Stanley Chief Financial Officer Colm Kelleher in an interview Tuesday night. “If the market fully decides that you need deposits, then it’s decided.”

The market caps of the Canadian banking and insurance fraternity are as follows (all in US$):

BMO: $21 billion
BNS: $40 billion
CIBC: $19.5 billion
MFC: $47 billion
RBC: $54 billion
TD: $43 billion

Take these six partners, and compare them to both Morgan Stanley and Goldman Sachs. Each presents a different, yet potentially interesting, fit.

About 30% of BMO’s assets are in the U.S., and CEO Bill Downe spent enough years working in the USA to be comfortable with that market. BNS is a bit conservative for such things, but they have the firepower. CIBC recently exited their U.S. i-banking biz, so it would be tough to return to the scene of the crime so quickly. Manulife has just announced a new CEO, which puts the current one in an awkward spot if he wanted to do one last deal before sailing off into the sunset. Royal is trying to grow its U.S. business lines, but its CEO has already said he’s staying on the sidelines right now. Which leaves us with TD’s Ed Clark, who certainly could make a credible play for any major U.S. institution right now, including these two (see prior post “Betting on the jockey is working at TD Bank” October 4-08).

The Canadian banks have been criticized throughout this decade for missing the boat on many of the transformative acquisitions that have been available over the past ten or fifteen years (see prior post “Matt Barrett the real winner in ABN Amro deal” April 23-07). Now that Prime Minister Stephen Harper has affirmed his opposition to domestic bank mergers, the strategic choices of Canada’s banks are pretty clear.

Organic growth via market share gains, chip away at small U.S. tuckunders, or reach in the same way that Charlotte-based NationsBank (now called B of A) has been doing for more than a decade. Recognizing that a conservative approach has its rewards (see prior post “Slow and Steady can still win the Race” September 16-08), you can’t help but ask yourself if you’d get a multiple lift by merging with either Morgan or Goldman.

Each of these two great firms turned a profit this week, despite huge drops in revenue. A flexibility that commercial banks just don’t have. Naturally, one would need to validate the balance sheets, but Bank of America was able to do that in a short period of time…at least on a cursory basis.

Out there as ideas go, perhaps, but turn your mind back a few days. Who, merely a week ago, predicted that Merrill Lynch would agree to sell itself? When you are hunting a trophy deer, you might sit in a blind for several conscecutive seasons before the target of a lifetime pops out behind a stand of trees. Hesitate, and the opportunity might be lost forever.

MRM
(disclosure – we own BMO, BNS and GS in our household)