TD CEO makes hard, but right choice
Mackenzie King, regarded by historians as Canada’s best prime minister, was a circumspect man.
But on a business trip in Geneva with Paul Martin Sr., the PM decided to impart some advice to the young Martin, regarded as the King cabinet’s most radical member.
“You know, Paul,” King said, “the most important things I’ve done are the things I prevented.”
A good leader can say no. On Thursday, Toronto-Dominion Bank pulled the plug on a planned $13.4-billion (U.S.) deal to acquire First Horizon Corp., a regional bank based in Memphis, Tenn.
Bharat Masrani, CEO of TD, said no.
It is not easy for such a prominent CEO to walk away from such a high-profile deal.
It would have been the biggest acquisition in TD’s history. It would have made TD the sixth-biggest bank in America.
It now amounts to stacks of legal documents headed for the dumpster.
Questions will be raised about the judgment of Masrani and his top team.
If First Horizon was worth buying in the first place, wasn’t it worth trying to negotiate a much lower price for it, in line with the 40 per cent plunge in First Horizon’s stock after the March failure of three U.S. regional banks?
Then again, how could a banker with the sagacity rightly attributed to Masrani go near a financial sector vulnerable to disastrous bank runs if interest rates skyrocketed?
Or maybe Masrani, nearing the end of his CEO tenure after seven years in the job, jumped at First Horizon almost on impulse, with insufficient due diligence, to put his personal stamp on TD.
Finally, was the ill-fated proposed deal, destined to drag on for 14 months (always a bad sign), hastened by rival Bank of Montreal’s earlier $16.3-billion purchase of California’s Bank of the West?
Masrani had been urged for years by Bay Street to do a big deal in the U.S. BMO’s triumph couldn’t go unanswered.
As much as readers will recognize that none of the above are sound reasons for making a decision, we will likely never know what exactly TD’s thinking was.
We do know that the First Horizon deal had been shaky for months, with U.S. banking regulators repeatedly delaying approval of the takeover.
And that by March, First Horizon was hemorrhaging deposits, more so than the average U.S. regional bank, according to banking analyst Paul Holden of CIBC in a client note.
As this space noted at that time, the poisoning of U.S. regional bank stocks among investors provided Masrani an opportunity to prevent what was shaping up to be a lengthy struggle to make this deal pay off.
As recently as March 2, Basrani was still resolved to get the deal done, describing the proposed First Horizon acquisition as “a great transaction that offers scale and new capabilities for our U.S. franchise.”
But that was before 11 of the biggest U.S. banks were compelled to provide a $30-billion (U.S.) lifeline to First Republic Bank, the fourth U.S. regional lender facing insolvency year to date. That gambit failed. First Republic was forcibly merged a few days ago into the larger JPMorgan Chase & Co.
The bank-run contagion spread to Europe with the forced merger of the giant Credit Suisse Group AG with its only Swiss rival, UBS Group AG.
By April, U.S. banking regulators acknowledged that as many as 200 U.S. regional banks were vulnerable to bank runs that would render them insolvent.
With that many U.S. banks on the edge, it is to be expected that new U.S. bank failures will pop up on the screen every few weeks.
And every one of them, including this week’s fresh hell, a suddenly debilitated PacWest Bancorp, has further eroded confidence in regionals like First Horizon.
TD is paying a total breakup fee of $150 million to escape from the First Horizon quagmire, a trifling sum for a bank of TD’s size.
Meanwhile, TD can look forward to a recovery in its share price, which, like that of BMO, has been penalized by investors for the two banks’ exposure to the U.S. regional banking sector.
First Horizon’s already depressed stock dropped by about half with Thursday’s announcement, which means TD’s offer for the bank was the only thing propping up its stock market valuation.
So, Thursday was a good day at the office for Masrani. And for TD. Masrani didn’t let an outsized ego commit TD to years of misery in trying to make a First Horizon deal work.
That might seem like part of the job description.
But such leaders are unusual if not rare; CEOs who would prefer the embarrassment over a scrapped deal to committing their enterprise to potential folly.
If not a hero, Masrani is able to say no. That will be his legacy.