This article was originally published in Maclean’s magazine on July 6, 1998. Partner content is not updated.How's this for a long-range forecast? In 1989-1990, when a mid-sized Canadian investment brokerage called Midland Doherty Financial Corp. was running on empty, management did the rounds of all the big banks and fund managers in an attempt to sell enough cheap equity to keep the firm going.
Merrill Lynch Buys Midland Walwyn
How's this for a long-range forecast? In 1989-1990, when a mid-sized Canadian investment brokerage called Midland Doherty Financial Corp. was running on empty, management did the rounds of all the big banks and fund managers in an attempt to sell enough cheap equity to keep the firm going. Only legendary Bay Street stock picker Alexander Christ agreed to a deal. His firm, Mackenzie Financial Corp., one of Canada's largest mutual fund companies, paid roughly $20 million for a 20-per-cent stake in what was soon to become Midland Walwyn Inc. "I think it's a good investment," Christ told Midland's top executives when they struck their bargain in the spring of 1990. "I'll buy it." Then he made a prediction: "I'm going to buy this stock now, and I'm going to sell it to Merrill Lynch at the end of the 1990s."
Until last week, this was Bay Street's idea of a great punch line. Merrill Lynch & Co., the world's largest investment broker, had spent a fortune building and promoting its Canadian operation during those Bonfire of the Vanities days in the mid-1980s, only to pull out for peanuts as soon as the good times ended. As recently as two weeks ago, financial executives discounted speculation about a Midland takeover after tracing the rumors back to Midland's own brokers and traders, who were selling their own and clients' shares while the rumors swirled. From $20 in early June, Midland stock jumped to more than $27 when the rumors reached critical mass on June 19.
But the Midland-Merrill marriage, it turns out, is no joke. After a weekend of intense negotiations, executives from the two firms sallied forth on the morning of June 22 to announce that they were indeed joining forces. At a news conference held simultaneously in Toronto and New York City, Midland chairman Robert Schultz and president William Packham (who will remain chief executive and chief operating officer of the new organization) unveiled Merrill's plan to buy Midland - lock, stock and loose-lipped brokers - for what amounts to $1.26 billion in Merrill stock, the highest price ever paid for a Canadian investment dealer. Pending regulatory and shareholder approvals, Midland, the largest full-service independent investment firm in Canada, will be absorbed into Merrill's growing global empire some time before the end of the year.
Midland's 3,240 employees - "local nationals" in the words of Merrill president Herb Allison - are being assured that there will be next to no layoffs, and that the organization they built will continue to grow and thrive, albeit under a new name: Merrill Lynch Canada. Yet the merger will inevitably trigger changes. From now on, retail investors can no longer do business with an independent Canadian firm; they have the choice of dealing with a bank subsidiary or with Merrill. The merger also marks the first time a big U.S. investment brokerage has bought a major Canadian investment firm, as opposed to setting up its own operation. Among other things, the high-profile return to Canada of Merrill Lynch will make it easier for Canada's banks to make the case for their own proposed mergers - the argument being that they need to become bigger to stand up to foreign competition.
Merrill and Midland executives talk as though this is already an epic turning point in Canada's financial services history. The agreement inspired some of the continent's shrewdest and most ruthless stockbrokers to wax peculiarly poetic. "It seems as if the moon and the stars lined up for us at this particular time," Merrill chairman David Komansky said. Schultz was only marginally less effusive: "We believe the Midland Walwyn-Merrill Lynch combination will catapult us over the competition with a goal to becoming Canada's No. 1 financial services firm." Schultz clearly regrets that Midland's successful "Blue chip thinking" slogan and logo will disappear in favor of Merrill's stylized bull. " 'Blue chip' was a strong brand marketing campaign," he said. "But nothing in our world is as strong as that bull."
The enthusiasm, however, was not restricted to those with a personal financial stake in the deal. (Schultz emerged from the negotiations with $31.5 million worth of Merrill stock, while Mackenzie Financial stands to reap $180 million in profit.) Fund managers praised the transaction because it brings a powerful equities trader into the Canadian market. Even top executives of the bank-owned dealers - in no position these days to dump on anybody else's merger plans - made positive if not exactly welcoming noises. It was left to Garrett Herman, the forceful chairman of Toronto-based broker Loewen Ondaatje McCutcheon - who, like Midland's Schultz, once worked for Merrill Lynch - to sum up the non-bank point of view. "It's fantastic," Herman says. "It's nice to see a high-quality organization back in town that's not a bank. It will sort of level the playing field for the consumer."
When people like Herman talk about the consumer, they generally mean big corporate clients. Those customers, however, do not have much trouble finding investment firms willing to compete for their business. The past 15 years have seen a proliferation of sophisticated products and services offered to corporations and institutional investors. Cross-border financing, a hot trend of the 1990s, means that Canadian companies have become accustomed to popping down to Wall Street for financial help.
Retail customers are an entirely different story. Despite the boom in mutual funds and other retirement savings products, the list of middlemen selling these products has been steadily shrinking for more than a decade. The banks gobbled up most of the big retail brokers in the late 1980s. Big U.S. firms such as Merrill, Prudential-Bache and Dean Witter Reynolds hightailed it back to New York. This is what allowed Midland Walwyn to become such a significant player in the first place. The company did phenomenally well, hustling roughly a 10th of Canada's corporate finance deals and going directly after small shareholders. The firm now has more than 600,000 client accounts containing $42 billion in assets, up from $6 billion in 1990.
While much of that growth can be attributed to the bull market, there is no doubt that Midland has worked hard for its money. Had it spurned Merrill's offer, the firm would have had a shot at becoming the third-largest broker in Canada after the two big bank mergers. But management was aware that as an independent going toe-to-toe with the banks, the firm also risked finding itself back where it started in 1990. Says a Midland executive: "There will be a tough stretch ahead. It's good to know we're with guys who know how to drive."
Schultz is satisfied that last week's arrangement assures Midland of a future. He's confident that Merrill is not just making a short-term investment to take advantage of the low Canadian dollar. Merrill executives such as Robert Grandy - who until last week ran the American firm's investment-banking group in Toronto and who now becomes deputy chairman of the new company - are determined to build their shop into the leading investment dealer in Canada. "The world is a very different place today than it was in 1990," Schultz told Maclean's. "And Merrill is a very different company." Rather than running a few international operations from a New York base, the company has been buying up mid-sized brokerages in markets where it already has a sales presence, including Britain and Australia. And far from heading home at the first sign of trouble, the company made a bold move recently by taking over Japan's failed Yamaichi Securities and announcing it plans to invest $227 million in the bankrupt brokerage over the next two years.
After spending eight years building Midland into a major Bay Street player, Schultz and Packham have a large emotional stake in seeing the firm prosper. "They had taken the business to the point where they were bumping up against a wall," Christ says. "Now, they have the size and the capital and the expertise of the Merrill organization behind them." This time, he is leaving it to others to predict how it will turn out.
THE ART OF THE DEAL
The takeover of Midland Walwyn Inc. by Merrill Lynch & Co. is the latest in a series of mergers and takeovers that have redefined the Canadian brokerage industry.
Goepel Shields & Partners of Vancouver joins with McDermid St. Lawrence Securities Ltd., also of Vancouver.
Toronto-based CIBC Wood Gundy Securities Inc. acquires Oppenheimer & Co. of New York City for $735 million.
RBC-Dominion Securities Inc. buys Richardson Greenshields of Canada Ltd. of Toronto for $480 million.
Bank of Montreal acquires Burns Fry Ltd. for $403 million and merges it with its brokerage affiliate, Nesbitt Thomson Inc.
Midland Doherty Financial Corp. and Walwyn Inc. merge, through a share swap.
National Bank buys Geoffrion Leclerc Inc. for $21 million and merges it with Levesque Beaubien, which it bought in 1988.
Maclean's July 6, 1998