Collapsing bank mergers and the lead up to life insurance demutualizations means it's all go in Canada's financial services industry
Canada's financial services sector is in flux. The country's largest banks are searching for plan B following disastrous merger attempts while major life insurers are on the brink of the most radical transformation in their history. In both cases, the communications challenges are enormous.
Ultimately, the banks' communications attempts failed last year and whether the mutuals will succeed remains to be seen. What is certain, however, is that the changing landscape of Canada's financial services industry has never been more closely scrutinized by governments, the public or investors.
That reality was illustrated in January of last year when, accompanied by great fanfare, two of Canada's largest banks - Royal Bank of Canada and Bank of Montreal - announced merger plans. The move surprised Canada's finance minister. His government was in the midst of a sweeping financial services sector policy review. Impatient to proceed, and certain the government would have no option but to bless the merger, the banks had launched a preemptive strike. Sounding miffed, the minister said he'd think about it.
Engaging message
A few months later, another pair of banking heavyweights announced their betrothal - Canadian Imperial Bank of Commerce (CIBC) and Toronto Dominion (TD). Fuzzy, feel-good TV ads appeared. Newspapers devoted oceans of ink to the mergers while banks launched a massive government lobbying effort. TD Bank chief Charles Baillie told analysts in May the government would look 'neanderthal' if it blocked the mergers.
Indeed, the deals met wild applause on Bay Street. Analysts and investors clearly saw the cost-savings advantages. The sell-side began beating the drums at high speed. Bank stocks flew. The banks' IR argument ran as follows: bigger is better; consolidation is taking place around the world; and banks must act fast or miss the boat. The unions were promoted as critical to their long-term profitability.
It seemed like a slam dunk. Almost a year later, however, the banks' strategy was in tatters and their merger plans shelved. So what happened?
Transaction unauthorized
Despite spending vast sums on consumer research and lobbyists, the banks utterly misread both the public mood and the political process. Alienating the government was a poor start. The prime minister pointedly noted the world's biggest banks – Japanese – were in dire straights. Meanwhile, Peter Godsoe, chairman of Scotiabank, aligned with some insurance executives to question the 'bigger is better' philosophy of his peers.
If government and business appeared skeptical, the public, having weathered a swift round of bank 'rationalizations' was particularly indisposed to the banks' arguments. In fact, finance department polls showed public support for the mergers shrank dramatically as the intense lobbying and PR campaign wore on.
While the PR folks cut a particularly hard 'messaging' trail, IR teams had their own challenges. The merger announcement sent IR teams working in high gear throughout the year. 'Analysts were initially very surprised,' says Nabanita Merchant, IR vice president at Royal Bank. 'We got a flood of calls. Of course, we had to quickly revamp our investor presentations,' she adds.
Because domestic media widely covered the deals, Canadians were relatively well informed. However, foreign investors were confused about the political process. 'Foreign investors wondered about all these delays,' says Merchant. 'Even domestic investors were skeptical about what they were reading and came to us to find out if it was accurate.'
'Most inquiries concerned the time line,' adds Kathryn Humber, VP of IR at CIBC. 'It was anyone's guess what the government would do. You could only talk about the next hurdle – task forces, government reports and so on.'
Odd man in
After the second merger announcement, Scotiabank found itself the one wallflower left with the other 'big five' Canadian banks paired off. The phrase 'dead man walking' splashed onto headlines. From an IR perspective, the worst thing to appear was moribund.
Scotiabank's response was twofold. On the public policy front, Godsoe suggested the mergers could result in excessive concentration. But the chairman's public opposition to the deals risked alienating his own shareholders, many of whom also owned other banks' stock. There were implicit rumblings to the effect that Scotiabank should leave well alone.
On the IR side, however, Scotiabank worked hard to convince the Street it could exploit the turmoil even if the mergers did go through. The mergers would be time consuming. While the other banks were trying to put their cultures together, Scotiabank would remain focused, picking up assets and personnel while exploring other ownership options.
Some on the Street began to come round to that argument, especially after a report last spring by a key analyst dubbing Scotiabank an 'orphan with options'. As the summer wore on with no encouraging word from the minister, rumors circulated and the 'merger premium' shrunk.
Separated before birth
Significantly, the stock prices of TD and CIBC began to separate. 'Most analysts viewed consolidation as adding shareholder value,' says Scott Lamb, director of IR and planning at TD. 'As time went on, the merger seemed less likely and people stopped valuing our stock based on it.'
The TD/CIBC union may have been strategically sound, but it was fraught with cultural hurdles. TD was lean, entrepreneurial and a Bay Street darling. CIBC had run into problems. Looking like a defensive merger, cynics say it was announced only to throw a wrench into the Royal Bank/Bank of Montreal process: if one merger risked government agitation over curtailing competition, two would be over the top.
For TD, consistency was not an IR highlight and this led to some confusion. TD chairman Baillie, an intellectual and evenhanded man, seemed of two minds in analyst presentations – the merger was both the greatest thing since sliced bread and merely a defensive tactic.
In the end, TD Bank was the first to concede the jig was up, with Baillie publicly declaring government approval seemed unlikely. While the move didn't endear him to his own or the other merger partners, TD claimed it was an investor disclosure issue. 'We felt we had information indicating the mergers were unlikely to happen,' explains Lamb. 'We had investors making decisions thinking it would.'
One morsel of information that may have figured was a letter sent by the Competition Bureau advising banks their proposed deals would unduly lessen competition. The banks considered whether the bureau's letters represented material change and warranted comment.
Still, the TD/CIBC union was based on a share price ratio and CIBC had just released abysmal quarterly results. Some observers wondered whether TD was getting pressure from shareholders to ditch the deal.
Plan B
Finally, on December 14, finance minister Paul Martin declared the two proposed bank mergers could not go ahead until the government had reviewed its entire financial services sector policy. If, as some predict, Martin becomes prime minister, it seems unlikely the banks will be talking merger again for the foreseeable future.
Despite frosty relations, bank management and government officials must now work together on the proposed financial services sector overhaul. Meanwhile, IR must take a new tack. Having formerly declared the status quo is not an option, most banks are now talking about continued rationalization and the shedding of non-core businesses.
Royal Bank doesn't call it plan B. 'It's plan A,' says Merchant. 'Soon after the mergers were shot down, we organized a conference call to underline our strategy. While a merger was consistent with that strategy, our plans stayed on track with the direction we'd announced.'
The IR life
While the banks hunker down, Canada's life insurers are about to embark on a brand new world. Within a year, Sun, Mutual, Canada Life Assurance and Manufacturer's Life Insurance (Manulife) hope to conclude a demutualization process which will add C$10 bn in capitalization to the Toronto Stock Exchange. The share distribution will be the largest of its kind in the country and significantly impact the Canadian economy.
Unlike the banks, the mutuals worked in concert with government regulators in formulating their plans. In their case, shrinking competition was less of an issue, but all parties were determined to avoid the pitfalls surrounding demutualizations elsewhere.
For example, the mutual holding company concept is not contemplated in Canada; share-related executive compensation is limited and 100 percent of the company's value must flow through policyholders. Consequently, the regulatory framework defused most complaints from consumer groups.
Still, being accountable to shareholders entails more responsibilities than being accountable to policyholders. Investors, for example, are more concerned about profitability. The insurers' sizeable splash means investors and analysts will be closely eyeing newly-converted companies.
The IR strategy for mutuals is to be proactive and accommodating. 'We are expecting the Street to be very demanding,' says Brian Lynch, newly appointed vice president of IR at Canada Life. 'We must understand what information analysts and investors want and how they want to receive it.'
A common admonition among IROs surveyed was to get the IR function up and running long before walking onto the equity capital markets stage. 'It is vital to have the infrastructure and relationships in place so you are ready on that special day,' counsels Edwina Stoate, vice president of IR at Manulife Financial.
Manulife set up its IR operation soon after declaring its intention to go public and has closely integrated it with the demutualization project. For example, its 'customer response center', which is an 800 number set up to answer policyholders' questions, reports directly to the IR department. 'We want to ensure that communication with those policyholders soon to be shareholders is seamless,' says Stoate.
Expensive option
A 100 percent retail shareholder base is expensive to maintain and probably won't engender the valuation a company deserves. In time, most mutuals are looking for institutions to hold about 60-75 percent of their stock. Out of the gate, however, the investor base will be 100 percent retail. While tax issues may dampen the number of cash-outs, most insurers are counting on a steady transition.
'You don't want many retail holders wanting to sell but unable to,' notes Canada Life's Lynch. 'A market overhang means institutions hold back.' Accordingly, all the mutuals plan a quick share issue with 'recycled' stock gathered from cashed-out policyholders to get the ball rolling toward a liquid institutional base.
The four mutuals are using a variety of communications media to explain demutualization to policyholders, consumer interest groups and the media. Some have organized 'town hall' meetings and sent out special mailings. All have copious quantities of information on demutualization available on their web sites.
A joint print advertising campaign was launched last October to explain demutualization plans to policyholders. A central message throughout the campaign was to confirm to policyholders that their benefits would not change as a result of the share distribution.
For now, life insurers must wait for Parliament to pass enabling legislation. Once board approval is obtained, IR teams will begin earnest communications with policyholders explaining demutualization and the voting process. If policyholders approve at a special meeting, life insurers are in the home stretch toward a public listing.