Acquisition by design

For some Canadian ventures heading south, cross-border expansion is worth the risk.

Peter Brown fires up a cigarette. Seated at the conference table of Canaccord Adams’s spacious digs in Boston, the chairman and CEO of Canaccord Capital (TSX: CCI) has just had a good week, reporting glowing financial results for Q3. Brown exhales plumes of smoke at his U.S. partner, John Adams, a courtly, elderly Bostonian in bow tie and slicked-back hair. “We’re up to 13 transactions in three days,” he crows.

Brown has every right to be blowing smoke. It’s been a solid year since the independent bank and brokerage house expanded into the U.S. by acquiring Boston-based bank Adams Harkness for US$20 million in January 2006. In the last fiscal year, the firm completed 157 transactions, totalling more than $4.2 billion in deal volume. Not bad numbers, especially considering that Canadian banks—not to mention many others—have a history of trying, and failing, to expand into the hypercompetitive U.S. market.

“Most Canadian businesses that come to the U.S. fail,” says Brown. “They think the culture is the same—and it’s not.” While Canaccord’s consolidated U.S. operations are just breaking even, Brown says he sees the U.S. expansion as

a potential $200- to $300-million opportunity. With fingers in three markets—Canada, Britain and the U.S.—Canaccord Capital is now positioned to capitalize on its niche: small and mid-cap companies seeking the best valuations possible around the globe.

The Canaccord–Adams merger’s relative success is due to an incremental growth strategy, combined with a focus on getting the logistics right—something that companies often overlook in the throes of a deal. Doug Robbins of business intermediary Robbinex, based in Hamilton, recommends setting up an advisory board of local businessmen, as well as legal and accounting firms before making a deal, “so you have local expertise where you need it.”

In buying Adams Harkness, Canaccord Capital established a toehold with a known U.S. entity that had a solid customer base and brand equity. It retained management for local expertise, but made sure everyone was clear on how the acquisition fit with Canaccord Capital’s overall U.S. strategy. In this case, both companies wanted to reach three markets. “Plus,” says Brown, “the price was right.”

The merger didn’t change the company’s strategy. Canaccord Adams is sticking to the parent firm’s traditional niche: companies with a market cap of up to US$2 billion. That’s a smart way to avoid treading on Morgan Stanley and Lehman Brothers’ turf, says Westwind Partners analyst Horst Hueniken in Toronto. Similarly, setting up shop in Boston, not New York, also makes sense. “Boston’s smaller,” says Canaccord Capital COO Mark Maybanks, “but it’s a major financial centre, and we can tap grads coming out of Harvard.”

Not that Canaccord is stuck on the East Coast. Company brass see growth in energy and resources, with plans to expand the nine-person office it opened last May in Houston. They might want to consider booking income in Texas, too. According to Robbins, Texas doesn’t charge state income tax.

In fact, capitalizing on different regulatory regimes is a big part of Canaccord Adams’s U.S. strategy. The firm offers U.S. entrepreneurs access to capital from markets such as the TSX Venture Exchange and London’s AIM. Both are cheaper than the compliance-heavy NYSE or Nasdaq. That said, the firm also has to watch out for shifting policies in all three countries. American regulators banned online gaming last year, so, Brown says, Canaccord’s out of that market. And Finance Minister Jim Flaherty’s decision in October to tax income trusts also affected the Boston arm—the income trust market was 6% of the firm’s global revenue.

There are other issues as well for cross-border acquisitions. Because Canaccord Adams is operating in different regimes, its staff have to be that much more sophisticated. Maybanks points out that sales, research, traders, compliance and IT need to think globally in terms of client base, and be up to date on cross-jurisdictional regulations. Consultant Robbins also stresses the value of hedgingto reduce exposure to currency fluctuations. “You don’t want to find yourself restating financials just because the currency shifted,” Robbins says. “Invest in currency futures, and you won’t get screwed.”

And then there’s the oft-overlooked cultural fit. Canaccord Adams combined a scrappy Canadian investment banker with a risk-averse Boston research outfit. Getting them to meld, says analyst Hueniken, remains a challenge. Maybanks says there’s “no question, Canadians and Americans do business differently.” For example, Americans expect all prospectuses to be ready as the deal goes through. “They’ll call and say, send me the paperwork, and we’ll say, there isn’t any yet,” says Maybanks.

Ultimately, Canaccord Adams will be judged by its parent company’s bottom line. Like Brown, analysts are optimistic. Hueniken has a Buy rating on the stock and a one-year target price of $21.75, up slightly from its current level. Business in Canaccord Adams’s market niche is picking up, with one recently completed US$47-million deal for organic food supplement manufacturer Sunopta earning the company a cool 70% fee.

When the Sunopta deal comes up, Brown smiles, and lights up another fag.