Fickle Rules in Bank M&A Land

The market can be fickle.

You’ve got to commiserate with Bank of Montreal (BMO:TSX) CEO Bill Downe. After years, maybe decades, of waiting to buy the right banking business in the Midwest, his bank pulled the trigger last week with the US$4.1 billion purchase of Marshall & Ilsley. By any metric, the acquisition was inexpensive compared to the comps, even with the US$4.7B kitchen sink writedown and the US$1.7B repayment of US government-owned pref shares. BMO’s Harris Bank division has underperformed the BMO Canadian P&C business for at least 15 years, and one can understand why growing critical mass is no longer an option for BMO in Chicagoland.

M&I was trading at US$50 not too long ago. BMO is paying US$7.75/share, and doubling its U.S. business and deposit base. (Soon, BMO will have to consider changing its name again to Bank of Chicago.)

So, the strategy made absolute sense (even if Lasalle might have been a better brand instead). The price seemed appropriate for the risks at M&I. Although M&I’s loan book is heavy in real estate loans, those can be transitioned out over time. All-in-all, made sense. The market hated it however, sending BMO shares down 6.5% in the first day, and another couple of bucks the next.

In the wake of the BMO announcement and some precise rumours, TD Bank confirmed that it would acquire Chrysler Financial for US$6.3 billion, picking up the unit from Cerberus. Experts loved the all-cash deal (hat tip Reuters), and so did the market as TD shares rose 3.7% on the day:

“The TD Bank acquisition of Chrysler Financial is an example of what can happen when foreign banks are financially strong, flush with cash, and want to expand into the lucrative U.S. market,” said Mark Williams, a risk-management expert at the Boston University School of Management.

“U.S. retail banks, such as Bank of America, have plenty to fear. The Canadian bankers are upon us.”

With US$400 million of goodwill, TD is clearly attributing some value to the brand in the US auto universe; how long ago was it that you could have bought all of the equity in Chrysler itself for US$400 million? But that’s not the point, of course.

According to Reuters, TD already has an auto loan book of $10.4 billion in Canada and US$3.3 billion in the United States. Chrysler Financial has US$7.5 billion in loans and leases outstanding, as well as a U.S. platform with about 2,000 dealer relationships that will establish TD’s national loan presence:

“Because we generate so many more deposits than we generate loans (at the U.S. branch bank), we’ve always said if we could find the right asset generating franchise, we would buy it,” TD CEO Ed Clark said in an interview.

Makes absolute strategic sense, as has been the case with most things that TD Bank Ed Clark has done during his tenure (see prior post “Betting on the jockey is working at TD Bank” Oct 4-07 and “My dear Edmund” Feb 22-08).

But the market seems to have no respect for the BMO deal, although BMO shares rose 1.3% in sympathy with the TD news yesterday. Complaints have been made about BMO using stock for the deal, and yet that was exactly what TD Bank did when it acquired Canada Trust and Ed Clark for $8 billion in 2000. TD picked up $38 billion of deposits along the way with the CT share swap, which is eerily similar to the US$40 billion of deposits BMO will add via their M&I deal.

I’m amazed at the double standards, and the market’s short memory. Leasing Chryslers — good. Retail and commercial banking — bad. All cash deal — good. Protecting capital ratios — bad. All stock deal for Canada Trust — good. All stock deal for M&I — bad.

Since we own both banks in our household, there’s nothing to be despondent about. This will work out over time. But the market’s ignorance of history and inconsistent standards are clearly on display this week.

MRM