In January 2001, when Royal Bank of Canada completed a $1.2 billion acquisition of Dain Rauscher, a respected regional brokerage and investment bank that traces its origins back to 1909, a group of senior executives from Toronto hurried down to Minneapolis to address their new employees.
Irving Weiser, who had been CEO of Dain Rauscher and has stayed on to lead RBC Dain Rauscher, began the assembly hall meeting by showing his Canadian employers a video of Robin Williams performing “Blame Canada,” a tune nominated for best original song at the Academy Awards ceremony a few months earlier. “We weren't sure how the Canadians would react,” says a Dain Rauscher employee. No wonder. The song is taken from the vulgar animated movie, “South Park — Bigger, Longer & Uncut,” and is sprinkled with obscenities. “But they loved it. When they laughed, it loosened up the whole meeting.”
Sure, the Academy Award version was toned down for prime time audiences, but playing it was a bold move nonetheless. But then, RBC executives understand bold moves. In an effort to replicate itself south of the border, RBC, Canada's largest financial institution, has spent around $5 billion on investments in the United States since 2000.
RBC's boldness may in fact be necessity, given the opportunities at home. RBC's offer of $95 a share was more than twice the value of Dain's shares at its highs in early 1999. RBC CEO Gordon Nixon, a former M&A man himself, has acknowledged that the deal was pricey, but maintains it was worth it — that is, if you seek growth. Or as an RBC broker puts it: “There are not enough people — or money — in Canada [to grow].” Besides, in Canada, banks, having already been through a consolidation wave years ago, are prohibited from merging any further.
Nixon has complained that Canadian banks are losing their edge to international financial firms with no such restrictions. Says an RBC broker, “We're a humongous company by Canadian standards, but we're not happy just to be the best in Canada. We want to be the best in the industry.”
Indeed. RBC's growth plans are in full swing here, in a nation more accustomed to exporting brand names to its much smaller neighbor. RBC, its letters dominating the towers of Toronto, traces its own origins to just after the American Civil War and now has 10 million Canadian clients, or about one-third of the population. But it is still unknown here. One wonders for how long.
A little over a year ago, RBC bought Dain Rauscher, which added 1,100 brokers and U.S. investment banking to RBC. It closed on the $600 million Tucker Anthony Sutro deal last fall. (The deal also included Richmond, Va.-based Branch Cabel & Co.) And with that RBC had doubled the size of its wealth management business and established a major foothold in the U.S. market.
In short, American reps who have never had any cause to pay any attention to the behemoth from the north, might eventually find an RBC Dain Rauscher card on their client's kitchen counter someday. RBC Dain Rauscher, as the combined Dain-Tucker firm is called, is now the ninth-largest U.S. full-service brokerage firm, with a combined sales force of 2,100 reps and a network of 165 brokerage offices in 41 states, overseeing $100 billion in assets. The firm has more than 2 million customers.
Above all, it gave RBC something approaching a coast-to-coast U.S. presence. Tucker Anthony had offices on the East and West coasts, while Dain Rauscher operated mostly in the Midwest, with some exposure to the Southwest and Pacific Northwest. RBC had also gobbled up a midsized regional bank, an Internet bank and insurance units. The acquisition march is not over. In April, RBC bought $220 million worth of U.S. operations, mostly insurance units, from the Italy-based Generali Group. The deal included Jones & Babson, a Kansas City, Mo.-based mutual fund firm with $1.5 billion in assets under management, which will be run by RBC Dain Rauscher.
Now, the idea is to reap the synergies (cutting an estimated $130 million from its U.S. operations) while creating a large, fully integrated, cross-selling dynamo — although it is a task that is extremely hard to execute, says Tanya Azarchs, an analyst at Standard & Poor's.
While RBC shares trade near their all-time highs, the U.S. will be an interesting challenge. “In Canada, RBC has been a leader in cross-selling, with referrals from its branches to its mutual fund arm and to its retail brokerage,” says another analyst (who asked not to be identified). “But they did this with a well-known, trusted brand name. The RBC brand is unknown in the U.S., so there's an element of risk.”
Even having a great brand name is no guarantee of success. Citigroup, for example, tried the fully integrated strategy with Travelers (insurance), Salomon (capital markets), Citibank (retail banking and forex) and Smith Barney (retail securities) under one umbrella — but, in an apparent capitulation — it's now in the process of spinning off the insurance units.
Actually, the pressure is on. In the first quarter, the U.S. operations contributed around $53 million — a lousy rate of return on a roughly $5 billion investment. To be fair, it is early — very early. Analysts don't expect the U.S. acquisitions to contribute substantial earnings until at least 2003 or 2004. Although the first-quarter results blew by expectations, J.P. Morgan analyst Michael Granger says: “The jury is still out on the success of the company's expansion strategy in the U.S.”
Cost cutting is key. RBC says it expects the deal to produce $60 million in cost savings over two years. In October 2001, the firm chopped 500 back-office and administrative jobs at Tucker, 20 percent of its work force. (Most of Tucker's senior managers stayed, becoming regional managers for Dain.)
Although some disgruntled reps quit (as in any such takeover), RBC seems to be up to the task. Dain's biggest challenge was persuading the 900 Tucker Anthony brokers and their branch managers to endure the “repapering” of their accounts and other changeovers of the transition. “We view these financial consultants as our internal customers,” says RBC Dain CEO Weiser, “and we're asking them to make the changes first, in the hope of greater operational, technology, product and other expertise as they become a part of the enterprise.”
Certainly, Dain worked hard to keep the top producers and investment bankers, offering bonuses to those who stayed (at an estimated cost of C$176 million in 2002). Weiser, Peter Armenio, COO of the firm, and Charley Grose, head of the private client division, spent many hours visiting the regional offices to massage the brokers. After Dain announced the acquisition, it brought a dozen brokers and branch managers to the Minneapolis head office every Tuesday for 20 weeks to meet with essential personnel.
On the product side, Dain says the acquired brokers are already more competitive. They now have access to RBC Dain Rauscher's online account information service for clients. (There are no plans, though, to offer clients online trading.) The acquired brokers can also offer clients enhanced trust services, more mutual funds, college savings plans, insurance carriers and a wider array of managed account money managers, a specialty in which RBC excels at home.
The stronger product line and marketing support available at Dain have resonated with some Tucker Anthony brokers. “I can count on one hand the number of people who have chosen to leave,” says Armenio. The firm is coy about numbers, but says that broker retention is “dramatically better” than it had expected, especially given the state of the markets.
David Basile, a broker who left Tucker Anthony in January after 18 years, is one of the disenchanted. He says that from the Boston office alone, 14 of 60 producers have defected — mostly to other small regional firms — and another dozen may depart by year's end. “I didn't want to work for a bank that was trying to act like a wirehouse,” says Basile. “The wirehouses are interested in product distribution; the regionals put their customers first.”
Dain Rauscher brokers were generating about 25 percent of their revenue from fee-based clients. Tucker Anthony brokers in general don't do much managed account business, but they're likely to do more as they tap into Dain's greater support for fee-based pricing. Still, the merged firm has no specific target for fee-based revenues, and says it will not try to push clients in that direction.
In terms of market segmentation, Dain's approach is to offer different suites of products that can be profitably delivered to clients who have different needs because of their investment goals. The firm is not pursuing what Weiser calls “the ultra high-net-worth client.” Instead, it serves a clientele in a “pretty wide swath” of $100,000 to $5 million worth of investable assets.
Dain's customer base has a demographic profile similar to Tucker Anthony's clientele, but Weiser says the important question is: “What percentage of wallet do we have of these clients? We haven't surveyed Tucker Anthony clients yet on this. When you have more comprehensive packages of products and services for a client, when you perform custom portfolio planning for a client, you get a larger share of wallet.”
A priority is to double the firm's assets over the next five years to $200 billion (including mutual funds and other managed accounts). “If we could grow to 2,500 to 3,000 brokers over the next five years, that would be a success,” he adds.
Dain Rauscher plans cross-selling initiatives with Rocky Mount, N.C.-based Centura Banks, which RBC also acquired in 2001. The brokerage will open at least two offices in North Carolina later this year, using this platform to expand deeper into the Southeast.
The relationship should give Dain access to clients it couldn't otherwise reach. RBC Centura is offering mortgage banking to Dain clients, while the brokerage is marketing fixed income products in Centura's territory. “There are no home runs,” says Weiser, “but a lot of small opportunities that in the aggregate can add value to both franchises.”
Added value for which those Canadian acquisitors would be only too happy to be blamed.
