Jeffrey Solomon speaks at the Milken Conference 2024 Global Conference Sessions at The Beverly Hilton in Beverly Hills, Calif., on May 7.David Swanson/Reuters
When Cowen Inc. chief executive Jeffrey Solomon ushered two senior leaders of TD Securities into his office in March, 2022, he was entirely unaware of how the ensuing 20-minute pitch would redraw the future of his company.
A few months prior, he had received a vague e-mail requesting a meeting with Riaz Ahmed, head of TD Securities, and Robbie Pryde, then-head of corporate and investment banking. Now they were strolling through his New York office – emptied by the COVID-19 pandemic – with a takeover offer that would extend the reach of Canada’s second-largest lender into Wall Street.
“Every now and then you have a meeting that spins your head around and makes you look at the world differently,” Mr. Solomon said in a recent interview.
A year later, TD TD-T closed the US$1.3-billion takeover of the investment bank and Mr. Solomon became the president of TD Cowen, a division of TD Securities.
The spring of 2023 marked a major shift for the Canadian lender. After a blockbuster year for equity markets and merger and acquisition activity when TD and Cowen initially struck the deal, the market slowed to a crawl, crimping profit at TD Securities. Meanwhile, U.S. and Canadian lenders were cutting jobs to rein in soaring costs, souring culture and morale among bankers.
A few months after the Cowen deal closed, TD also terminated its takeover of Tennessee-based First Horizon Corp., upending its U.S. growth plans. That left the spotlight shining on TD’s integration of Cowen, which had just become far more difficult in an increasingly challenging market.
Wall Street is a vociferous landscape, with U.S., European, Asian and Canadian banks jockeying for business. For years, TD Securities had been growing at a steady pace, but it had gaps to fill in its investment banking business if senior executives wanted to truly compete in the United States – and the lender viewed Cowen as the perfect piece to fill that hole.
TD had spent years gradually building its U.S. capital markets business, focusing on fixed income, foreign exchange and treasury services. Buying Cowen – the division’s first U.S. acquisition in more than a decade – thrust the bank into equity capital markets, equity sales and trading, and research. It also bolstered its mergers and acquisitions, leveraged finance and prime services businesses.
“For us, the next phase of it was to say, okay, to really excel we need research in the United States,” Mr. Ahmed said in an interview. “We need the ability to trade equities in the U.S. and we need to strengthen our investment banking platform. And the industrial logic of this acquisition was that Cowen gave us all three.”
For Cowen, the offer arrived as its executive team was considering ways to fund its growth plans to move into lending and invest in growing sectors, including health care and biotech. The backing of TD’s enormous balance sheet came at the perfect time, providing Cowen with a funding base to lend to its clients.
However, by the time the deal had closed in March, 2023, the TD and Cowen leadership teams found themselves facing a tepid market beaten down by high interest rates. Equity issuances and initial public offering activity were slow, and merger and acquisition deals tumbled from the previous year.
“The macro environment wasn’t too conducive,” National Bank analyst Gabriel Dechaine said in an interview. “You had a lot of inflation and market volatility. The kind of business that Cowen is skewed to, that type of activity doesn’t take place as much in the market environment that they had during the first year in which TD acquired it.”
At the same time, TD Securities was struggling with mounting costs as it invested in the business, integrated Cowen and onboarded employees, pushing compensation expenses higher as it competed to retain talent. TD had earmarked US$450-million to spend on the integration, including US$200-million to pay staff incentives to stay with the company.
The bank has also had to fold in Cowen’s various divisions incrementally over the past year, which meant that it could not immediately streamline the two businesses’ technology and operations onto the same platform to save on costs.
After the close of the acquisition, TD Securities’ growth was stunted for the first three quarters in 2023. In the fourth quarter, wholesale banking revenue fell 5 per cent while expenses spiked 16 per cent from the previous quarter. The unit’s profit plunged 94 per cent.
The division’s efficiency ratio – a key metric of productivity that measures expenses as a percentage of revenues – surged to 97 per cent from 69 per cent in the same quarter a year prior. (The higher the ratio, the less efficient the business.)
But Mr. Ahmed says he expects to bring the efficiency ratio down in the mid- to high-sixties range over time as the market rebounds – allowing TD to bring in more revenue through Cowen – and its investments in the business start to pay off.
“We’re going to be thoughtful about it in the sense of saying, let’s take expenses out where you can find the efficiencies and remove the duplications, but also invest in areas that you want to grow,” Mr. Ahmed said. “And particularly if we have that capacity and as the markets continue to be more active, we want to be ready for those capabilities to be put into use.”
While the integration has unfolded, TD has also had to spend hundreds of millions of dollars to remediate its risk and controls processes, stemming from probes by U.S. regulatory and law-enforcement agencies into the bank’s anti-money-laundering practices.
“The risk and control expectations around banking are increasing everywhere in the world,” Mr. Ahmed said. “We need to make those investments, and continue to make those investments, but so are all our counterparts.”
TD and its peers have also been culling their work forces to rein in rising expenses. Since launching a restructuring program late last year, TD has cut about 1,200 jobs from its base of more than 100,000 employees. About 20 per cent of those reductions were made in TD Securities.
Part of those cuts came from pieces of Cowen that TD sold owing to regulatory barriers or because it did not see any value in expanding the platform, including its cryptocurrency unit and a smaller prime brokerage division.
After a tumultuous year, the business is showing signs of recovery. In the bank’s most recent second-quarter earnings, TD Securities revenue hit a record high on a pickup in trading-related activity, underwriting fees and lending, and the unit’s efficiency ratio fell to 74 per cent. Its U.S. peers have signalled that they expect investment banking and global markets business to pick up throughout the year.
“The equity offering calendar really just kicked in this year,” Mr. Solomon said. “I actually feel fortunate that the markets were having so many challenges last year because, if the markets had been going, I think we would have missed a bunch of things as we were just getting ourselves integrated. The fact that the markets took a little bit of a pause last year and it was a difficult year – we could just focus. As the markets began to turn back on this year, we were ready to go.”
The real test will play out over the next few years as the bankers from different cultures – TD, a highly regulated bank with a more buttoned-down culture, and Cowen, a scrappier mid-market dealmaker – work together and share insights on the business they hope to win.
“It’s important in any acquisition that the cultures mesh, but in a capital markets, wholesale operation, it can be very disruptive,” Mr. Dechaine said. “You’ve got big egos, and they’re not always going to want to work together. It could be a disruptive factor to the process.”
TD Securities’ office in New York is not as big as those at the major U.S. banks, some of which seem cavernous enough to land a small airplane. But the Canadian lender’s team has grown so quickly that it needs to lease extra space at another tower.
At the luxurious One Vanderbilt building perched high over Grand Central station, TD Securities’ office has been in a state of musical chairs. Rows of desks sit vacant, waiting for the arrival of Cowen’s employees. The teams have been gradually moving into TD’s offices, with all the Cowen bankers expected to be settled in their new desks by the end of the year.
TD’s U.S. team has been meticulously planning the seating chart, stacking the trading floor to make sure the right people are sitting together and help blur the stiff lines between the disparate teams.
The desks – each topped with four massive computer screens – are speckled with small Canadian, U.S. and Pride flags, mirroring a staff made up of a mix of Americans and Canadian expats from the Bay Street trading floor in Toronto.
The bank moved Sante Corona, who became co-head of TD’s global equity capital markets business when the deal closed, to New York from Toronto to bolster conversations between TD Securities and TD Cowen’s equity capital markets business.
Late last year, TD Securities added former New York-based Credit Suisse bankers to its team, including Tucker Martin as managing director of equity linked capital markets and Jim Spencer as co-head of the global financial institutions group.
If the senior leaders fail to convince TD and Cowen staff that they are better as a combined team, then they have “missed the opportunity,” Mr. Solomon said.
“As much as we talk about strategy, culture and people eat strategy for breakfast in our business,” Mr. Solomon said. “Of all the skepticism that might have been out there about a big firm buying a small firm – everybody’s got their narratives and their own concerns – we’ve been here for a year and the opportunity set for people on an individual basis, on a team basis, we’re serving clients unequivocally better here than it would have been at either organization on a stand-alone basis.”
Meanwhile, TD’s Canadian competitors are jockeying for the same business. Two blocks west of TD Securities’ office in New York is Bank of Montreal’s capital markets team, which is hoping to benefit from the larger footprint of its takeover of California-based Bank of the West. A quick subway ride south, Royal Bank of Canada’s capital markets division looms over the Hudson River and has been expanding its team in a bid to take market share from the major U.S. banks.
TD Securities is still just a fraction of the size of its biggest Canadian rival in the market. In the second quarter, RBC Capital Markets posted $1.7-billion in revenue south of the border – nearly as much as the $1.9-billion generated by TD Securities’ entire global business.
With Cowen, TD now has a more influential seat at the table with the biggest investment banks in the U.S. Since the deal closed, TD Cowen has participated in 148 equity offerings.
Last summer, TD Cowen advised Intel Corp., one of the largest U.S. chipmakers, in the sale of its holdings in Mobileye Global Inc., raising about US$1.5-billion for its expansion plans. The opportunity placed TD Cowen as an adviser alongside other major U.S. investment banks, including Goldman Sachs and Morgan Stanley, as well as Royal Bank of Canada.
TD Cowen also co-ordinated a non-deal roadshow – which offers investors a behind-the-scenes glimpse at a company’s performance – for chipmaker Nvidia Corp., which has seen its share price soar 209 per cent in the past year.
With deals expected to pick up as interest rates fall, Mr. Ahmed said that the full benefit of adding Cowen’s revenue to its roster will ramp up in the years ahead.
“We are credibly able to go in front of some of our most significant clients and say to them, ‘We should at least be a passive book runner if not an active book runner in an equity deal in the U.S.,’” Mr. Ahmed said. “We would have never ever been able to even dream of that without the acquisition.”