Big Six eye U.S., fintech sectors for acquisitions
Canada’s Big Six banks are coming out of the pandemic with billions of dollars in extra cash and are looking to deploy that money to fuel greater growth through acquisitions.
The banks’ chief executive officers told a financial conference on Thursday they are all shopping for companies that either extend their reach into the U.S. market or can give them an edge in financial technology. But that if they cannot find the right price then they are confident in finding other ways to compete.
While Canada’s banks have been investing in fintech for years, the country’s biggest lenders have been relatively docile when it comes to acquiring new technology and clients by purchasing its technology-focused competitors.
By contrast, banks in the U.S. have been more willing to write big cheques to scoop up fintech startups. In 2019, Morgan Stanley, for example, bought Calgary-based employee stock manager Solium Capital Inc. in a deal valued at $1.1 billion.
When asked about Royal Bank of Canada’s appetite to make big bets in the space, CEO Dave Mckay said the country’s largest lender typically looks at potential fintech acquisitions in the $50-million to $100-million range. At higher prices, it’s cheaper for the bank create a similar product of its own, he said in response to questions from Scotiabank analyst Meny Grauman.
“To the hypothetical question of would I spend $1 billion on a fintech? Yes, if it drove an appropriate amount of shareholder value at the end of the day,” Mckay said during the Scotiabank Financials Summit.
“Given that there’s no asset and that it’s 100 per cent goodwill on the price and that they’re often losing money when you acquire them, it’s expensive and it’s dilutive, and you have to be really confident of your synergies and your business plan. What we found through (RBC) Ventures is that we can build it ourself.”
The bank launched its startup accelerator RBC Ventures in 2018 as a tech incubator to create businesses that connect with potential customers who are not necessarily shopping for banking products. To date, the unit is scaling 10 of the 30 ventures that it has created.
Valuations have been on a tear this year, with a parade of startups soaring to unicorn status — a key milestone for tech startups that are valued at US$1 billion — including Visier, Clio, Wealthsimple, Clearco and Nexii. Overall, the surge in financing for new ventures has increased the cost of scooping up startups for their technology and clients.
Mckay said that RBC had recently considered an acquisition in the health-care space in a potential deal worth less than $500 million to attract medical healthcare professionals, which did not materialize.
“When you’re looking at making a bigger acquisition, they’re dilutive because you’re paying someone for all the work that we did on our ventures at the end of the day, so it’s a harder hill to climb,” Mckay said.
“When we looked at something in the healthcare space, it was losing money at the end of the day. And you had to look at this sticker price and say, what type of synergies do I have and what does my shareholder get versus the seller, and too much of the benefit often goes to the seller and you’re better off executing it yourself.”
Toronto-dominion Bank has not been shy about its interest in pursuing acquisition strategies, especially to grow its business south of the border. On the fintech side, CEO Bharat Masrani said that the bank will continue partnering with and acquiring startups, but that the bank is unlikely to “swing for the fences” and it would need to provide value for shareholders and customers.
Masrani added the bank has considered acquisitions in this space, but that some startups do not fit the regulatory requirements.
A looming shift on the regulatory front is the open banking framework recommended by the federal government’s advisory committee, which was released in August. The proposed regulatory change would allow consumers to determine how to share their banking data with financial service providers and could reduce barriers to switching financial institutions, which Canadians tend to avoid.
National Bank acquired a majority stake
in Montreal-based financial-data platform Flinks in August in a $103 million deal, taking an 80 per cent stake in the startup and betting on data-sharing as Canada moves toward introducing open banking.
Chief executive Louis Vachon said the National Bank is unlikely to make large fintech acquisitions, but that it is considering investments similar to its deal with Flinks, as well as smaller purchases.
As organic growth opportunities slow in Canada, the U.S. is becoming the biggest battleground among the Big Six.
Bank of Nova Scotia is exploring acquisitions to extend the reach of its wealth-management business in the U.S., including advisory teams.
“It won’t be a sizable acquisition in terms of dollar amount, but you can either buy teams of people or an existing business,” said CEO Brian Porter. “We’re looking at both.”