by Stephen McPhie, CA
Partner, RSD Solutions Inc.
In late December 2010, Bank of Montreal (BMO) agreed to acquire Marshall & Ilsley, a Wisconsin bank, in an all stock deal at a premium of around 34% to M&I’s share price which had been on a downward trend since early 2010. M&I had been bailed out, mainly due to bad real estate loans and BMO also agreed to purchase $1.7BN preferred shares from the U.S, government issued under the Troubled Asset Relief Program or TARP.
The transaction appears to have strategic logic in extending BMO’s Chicagoland subsidiary through Harris Bank into a contiguous area and was welcomed by some analysts at least. It also illustrates how Canadian companies can take advantage of the strong Canadian dollar in looking at strategic acquisitions in the U.S. and how Canadian financial institutions have the double advantage of depressed prices for many U.S. businesses in the sector.
However, there has also been some criticism and bad press concerning both the acquisition of M&I and M&I itself. Repaying the TARP funds to the U.S. government allows a number of executives of M&I to be enriched by the deal under change of control clauses. In fact the CEO of M&I gets $18 million and a bigger job – he will become CEO of Harris. Otherwise, conditions under the TARP program would not have allowed such a payout.
Now there’s some further news. In Wisconsin, as in other states, inevitable government cut backs are starting to be felt. Also inevitably a lot of people that are being hurt feel very aggrieved that the mess was not their fault and that a lot of those responsible got rich. Now there is a campaign to punish companies that helped the governor and one of those businesses happens to be M&I Bank. Seems that a number of people have been withdrawing their funds from the bank. Fortunately for BMO this does not seem to have become a fully fledged run on the bank but I’m sure there were a few anxious moments high up in First Canadian Place in Toronto (BMO’s main office).
Will this hurt BMO’s business in the Midwest? Probably not much in the long run - and it is a long-term investment. Nevertheless, it would have been interesting to see the internal risk assessment done by BMO when evaluating this deal. Would these factors have made it onto the list of known unknowns or unknown unknowns (to borrow a phrase from a former high U.S. government official)? How much foresight and imagination do you put into your risk assessments for your business?
No comments:
Post a Comment