Bank of Nova Scotia chief executive officer Rick Waugh finally has the mutual fund company acquisition he needs to vault his bank into the major leagues of money management, but the $2.3-billion agreement to purchase DundeeWealth Inc. is only the start of the challenge.
Cutting the cheque is easy. Keeping the assets, and the managers, is the tough job.
Shareholders are going to have big questions about how the bank will meld the two companies' cultures and keep important people, but Scotiabank doesn't have many answers. The conference call with executives was scant on details on some key issues, most noticeably on the plan for retaining the star money managers and financial advisers that keep the assets rolling in.
One of the drawing cards to working at an independent like DundeeWealth, whether it be as an adviser or a money manager, is that you are not working at a bank. The same is true of customers. Some are there because they didn't want to go to a bank. So Scotiabank has a battle to keep them all.
With DundeeWealth, Scotiabank increases the number of advisers it has selling funds by about 60 per cent. The bank jumps from an also-ran to No. 5 in mutual fund managers in Canada.
Mr. Waugh's ability to hold on to the portfolio managers at DundeeWealth who manage those funds, and the advisers who sell them, is going to make or break this deal. Get this wrong and the $1.6-billion that Scotiabank is paying for goodwill in the total price tag is worth not much at all.
Without the big names like Rohit Sehgal whose performance has been drawing cash into the company's hot Dynamic funds at an industry-leading pace, DundeeWealth is a collection of leases, computers and office furniture. Scotiabank has plenty of all of those (except, apparently a $22-million trading system that it's getting in the purchase, the one big synergy highlighted on the call).
Because there was so much perceived key man risk with DundeeWealth, many in the market thought that CI was the more likely target for Scotiabank. Rightly or wrongly, CI is viewed as a culture that would more easily fit with a bank culture on everything from spending - CI is famously frugal, as is Scotiabank - to the personalities of the fund managers.
To be sure, the people at DundeeWealth have long known they would likely end up toiling for Scotiabank, but now that it's happened there will be immense pressure on the bank to ensure that those people stick around. The usual tricks are big cheques, promises of share awards that vest down the road, lockups and the like. So what retention plans does Scotiabank have to reassure shareholders that it didn't pay up for nothing? So far, not much.
On the conference call, the bank's executives gave no details, only pledges. The bank "will be working very closely" with David Goodman, the CEO of DundeeWealth, on that, said Chris Hodgson, the bank's recently minted head of wealth management. "We understand the importance of that and we will ensure it is in place."
The only real detail is that the popular Mr. Goodman will stay on within the Scotiabank platform as head of DundeeWealth to try to nurture his advisers and managers, which he's reputed to be very good at.
Another way to get managers and advisers to stick around is to grow their assets, because it means more cash in their pockets. If Scotiabank can increase the cash flowing into DundeeWealth's funds by utilizing all of their bank branches and financial advisers, that should help.
What are Scotiabank's plans on that front? Well, none, really. So far, the bank plans to sell its funds through its branches, and DundeeWealth's Dynamic funds through the DundeeWealth adviser channel, which will remain.
"We haven't made any decisions on that front," Mr. Hodgson said, while stressing "significant opportunities on the growth side."
Still, the bank isn't forecasting any revenue synergies at the moment. It's just talking about cost savings, like that $22-million trading system.
Scotiabank may have been forced by a fast-moving acquisition process to shoot first and look at these big questions later. But for shareholders, the answers are pretty important.
© 2007 The Globe and Mail. All rights reserved.
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