TD Bank Group to acquire U.S. investment firm Cowen Inc. for US$1.3 billion

TD Bank Group is accelerating its international investment banking growth with a deal to buy New York-based Cowen Inc. for US$1.3 billion in cash.

The bank said Tuesday that the deal will bolster its investment arm, TD Securities, by adding capabilities with global equity sales, trading and execution platforms as well as increased depth of research coverage.

“This is an opportunity that doesn’t come every day, and we felt that this was critical for our growth aspirations,” said TD chief executive Bharat Masrani on an analyst call about the deal.

“You’ve heard us talk often about our aspiration to build an integrated North American franchise with global reach … frankly, this accelerates our aspirations by many, many years.”

TD Securities CEO Riaz Ahmed said the deal brings in a more mature U.S. equity brokerage and capital markets operation that can offer a wider array of services to clients and add depth on policy and sustainability research.

“Our clients tell us regularly that given their trust in TD and the value that we add, they would like TD Securities to support them across a broader range of products and markets. This transaction allows us to do exactly that,” he said.

The deal will boost TD Securities revenue by more than a third, and brings 1,700 staff from Cowen into the bank, where parts of the combined business will operate as TD Cowen, a division of TD Securities.

The division will be headed by Cowen chair and CEO Jeffrey Solomon, who mentioned on the call that his grandmother is from Saskatchewan, and that he’s gotten along well with Masrani and other TD executives since they approached Cowen early in the year.

“These transactions are much more about the people that I think investors give us credit for. We couldn’t be doing this if we didn’t feel strongly about the interpersonal connections we’ve made over the past few months.”

To help hold on to key people, TD expects to spend about US$200 million in retention costs over the next three years as part of the US$450 million total cost of integrating the firm.

Keeping top talent will be a key challenge for the deal, said Scotiabank analyst Meny Grauman in a note as he ranked the deal as negative.

“The track record of successful cross-border capital markets acquisitions is small, with retention of people being the key obstacle over the medium to long term.”

TD on Monday announced it had sold US$1.9 billion worth of shares in The Charles Schwab Corporation to help pay for the deal, which Grauman said effectively trades some U.S. wealth management exposure for U.S. capital markets exposure.

“The diversification inherent in that trade is not necessarily a bad thing, although we note that the market generally prefers wealth to capital markets.”

TD’s purchase price represents a valuation multiple of 8.1 times Cowen’s 2023 estimated earnings, which National Bank analyst Gabriel Dechaine said was attractive and reflects the current market backdrop.

The transaction reduces TD’s ownership in Schwab from 13.4% to 12%, but the bank said it has not changed its strategy on Schwab and has no plans to sell more shares. TD, which sold the shares at US$69 a piece, acquired the shares when Schwab bought TD Ameritrade in 2020 and its shares were trading at US$37 each.

The deal comes as TD is also still working to close its US$13.4 billion acquisition of Memphis-based First Horizon Corp., but the Cowen deal is neutral on the bank’s capital requirements thanks to the Schwab deal, and it doesn’t expect any problems in managing the two integrations, said Masrani.

TD says it expects to achieve US$300 million to US$350 million in revenue synergies by year three post-deal closure.

The transaction, which has been approved by the boards of directors of TD and Cowen, is expected to close in the first calendar quarter of 2023, and is subject to customary closing conditions.