What was in the mind of BMO's CEO to dilute BMO shareholders of common stock by 15% to enable the M&I acquisition ?
Why would any financial institution pay to buy M&I which had just posted eight(8) quarterly losses ? Losses are expected for the next 18 to 24 months.
M&I should be paying BMO to take them over !!!!
It was reported there were some 90 analysts working on this deal. From the details of the deal did they spend most of their time in the bar ?
What did BMO pay for ? One of the key arrangements was for BMO to:
1) mark down M&I's portfolio of loans by $4.7 billion after M&I wrote off much more over the past year.Why was this mark down not reflected in the price paid by BMO for M&I ?
2) repay $1.7 billion in M&I's TARP loans. This repayment should have been made by M&I as a condition of the acquisition.
Is this acquisition as bad as RY's acquisition of Centra in 2001 and Alabama National Bank ?
Should BMO's shareholders should be using the word "OUT" when it comes to Downe ????
Is this another example of the "blind leading the blind" as it relates to US Footprint expansions by Canada's Big 5 Canadian Banks ?
Mr. Downe was not the CEO when the Canadian Governments of the day vetoed the attempted mergers, first with Royal and a few years later with BNS, As to dividends, BMO has a stated policy, preceding Mr. Downe's tenure I believe, to pay out a higher percentage of its earnings as dividends than the other banks. Its dividend is currently the highest in both dollar amount and % yield on current share price. All of the Canadian banks maintained their dividends unchanged during the crisis, and have not increased them, expressing uncertainty as to what capital requirements will finally be under international rules; the Canadian Government and the Bank of Canada have been resistant to the most stringent suggestions by the Europeans. I have never heard that BMO is under more pressure than the other banks to increase its dividend, which by most standards is generous.
BMO is one of the 3 Canadian major banks to have a substantial US presence. The others are Royal, as noted, and Toronto-Dominion. BMO has been the the most conservative until now in expanding its long established footprint through Harris, while both Royal and TD have been quite active more recently. The prevailing wisdom is that Royal has been the least successful, and TD has been the most successful, which has been reflected in their relative share prices in the last year or so. There is a school of thought that all the Canadian banks tend to return to norm in their share price performance, so that one should always invest in the worst performer in the recent past as it will it nearly always outperform. Watch Royal's share price in the next year or so.
BMO shareholders received news of executive changes yesterday.
After diluting BMO's shares by 15% where is the "pink" slip for Downe ?
Downe has done more damage to BMO's common stock than any other CEO.
How happy are BMO cdn$ common shareholders with Bill Downe's performance in 2010 ?
On December 31,2010 BMO closed at $57.48 only $1.63 or 2.9% higher than the $55.85 close on December 31,2009.
The Downe engineered BMO bail out of troubled Marshall & Ilsley for $4.1 billion in BMO stock lead many to ask if Downe knows anything about banking. The stock market answered by dropping 10% on the news.
Downe futher distinguised himself as a negotiator by:
1) agreeing to repay $1.7 billion M&I owes in TARP
2)issuing .1257 of BMO's common shares for each share of M&I. The deal values M&I at $7.75 a share, 34% higher than the day before closing price of $5.79. Downe must be be on Paulson & Co's Xmas card list as M&I's sixth-largest shareholder celebrated a 34% one day capital gain.
3)immediately marking down M&I's loans by $4.7 billion or 12% of total loans as at September 30th,2010.
4)buying M&I which has posted eight(8)straight quarterly losses.
BMO's common shareholders need to be watching how much in 2010 bonuses and salary BMO's board is going to pay its CEO who made $1.63 or 2.9% in 2010 compared to the CDN TSX which was up 14% in 2010.
Should the underperformer Downe be "OUT" ?
Was the deal that bad?
a)Issuing shares is definitely better than paying $7 cash - as BMO shares would probably drop a lot more on that news.
b) The shares had been at or above the offer price in July of 2010. So it would sound reasonable that they would have to pay at least the high of 6M.
c) A bad qtr in Sept (last report)? Maybe but the shares rose the day after.
d) Payment of TARP $$ on the surface its a bad idea but all backs that have paid tarp have done well.
e) Overall was it good? I would have preferred that they put their $$ elsewhere but the Cdn $ is at an all time high vis-a-vis the US$ so it may work out.
Agreed and best wishes to you for 2011.
RBC Bank(USA) began almost 10 years ago with a similar financial arrangement. At the time RY's CEO and CFO told shareholders the deal would be accretive to earnings after 2 years. That was 8 years ago and billions of losses under the bridge.
I didn't exactly say I agree with you on the FASB issue, I just said I could see your point. I think the temporary relaxation of the rules made sense at the time. The market overreacts both positively and negatively. The markets were tumbling and it was time to step back until a clearer view of reality could be seen. So my take on things is the real estate market bubble highs were ridiculously high, but to force a "right now" valuation under those conditions risked taking the whole system down with runs on the banks. That would not have been good for anyone-including Canada. I will agree that politicians are going to need the courage to deal with the debt and valuation issues sooner rather than later.
In a perfect world asset/liability management would function the way you envision. However, it is not a perfect world, and almost impossible to match mortgages to deposit instruments. That is why there is a secondary market for mortgage instruments. The fraud, nonsensical apparaisals, SIVs, Rating company dereliction etc. are beyond the scope of this discussion. Suffice it to say the system worked well before all of the abuses took place, and as a result bank assets were fairly valued. Right now there is probably more risk to the downside. However, I don't think it will be catastrophic.
Interesting comments on the media and anaylsts and dividends. Jack Puelicher, the former CEO of M&I once famously stated that "M&I has never been managed for the benefit of the analysts, and never will". Funny how M&I got into trouble when they began to manage the company to the quarterly numbers rather than the long run steady management that was always the hallmark of M&I.
I still think you are wrong on the level of future charge-offs, but only time will tell. Remember that they have already taken significant haircuts on the troubled loans they haven't charged off entirely, so I don't think this is a case of a ticking time bomb. I seriously doubt Mr. Downe is so self destructive that he did not protect BMO (and by proxy himself) when he had the BOD approve this deal.
Did take a brief look at RY's message board. You are not exactly an optimist, but that is okay as you do give serious thought to your comments. I think we've gone as far as you and I can on this merger, and actually my holiday is over and I have to go back to work. Market seems more accepting of the deal today, but is subject to daily change. Let's resume after closing as one of us is "righter" than the other. Best wishes for 2011.
While we agree it is unfortunate the mark to market FASB rules are water under the bridge had the rules has an opportunity to be objectived while remaining in force there would have been an opportunity to make improvements. For example, where bank assets (5yr term mortgages) and ( say 5 yr term CID's) bank liabilities are perfectly matched as to maturity would a classification of "Assets/Liabilities held to Maturity" not been possible? The limit on the maturity would not exceed say 5 years. Because the maturities are perfectly matched classification would not have been elgible for "mark to market". The bank would earn a constant spread on funds over the 5 year period. I realize most regional US banks flip mortgages for a fee, once they are made, to a broker for Fanny & Fredie funding. This process needs to be carefully reviewed and changed in my opinion.
BMO was under significant pressure to increase dividends because earnings per share(EPS) where on the increase. The main reason why EPS was on the increase was because provisions for credit losses(PCL) was dropping very quickly year over year.Furthermore, over the past few years the Big 5 Canadian Banks including BMO have established dividend payout ratios of between 40% to 50%. Once EPS approaches the lower end of the payout range bank analysts,the Canadian media and pension and mutual fund managers begin to make a lot of noise about increasing the dividend.This was very much the case in the weeks prior to the M&I deal announcement.
The Big 5 bank executives must decide whether to pay out the increased earnings to shareholders in the form of dividends or invest the capital by acquisition or internally to expand/improve on brick and mortar and/or technology. In BMO's case no dividend increases since Fiscal 2008 even though the dividend was in the 5% range and much higher than the remaining big 5 Canadian banks.
The Big 5 Canadian banks have never cut dividends and it would take more than we have experienced over the last few years to witness a dividend cut. Once declared by the board the capital is lost to the CEO.
To develop a better insight into the M&I/BMO deal it may be helpful to once again look at the main players. JPMorgan Chase & Co advised Bank of Montreal.In this regard was JPMorgan the provider either directly or indirectly of the 90 or so analysts ? On the M&I side there was Paulson & Co and Bank of America Merrill lynch.
Mr. Downe's has made his reputation in the lending area of BMO. Although I can not certain of this I do not think he was directly involved in 1998 with the failed merger of BMO (not Bank of Nova Scotia) and Royal Bank of Canada.
Unless all loans and contigent liabilities of M&I have been marked to market the losses will continue to surprize on the downside especially in the real estate area.
When and if the deal losses surpasse the $4.7 billion mark down amount this will probably mark the end of Mr. Downe's carrier with the BMO.
The waiving of significant amounts of voluntary compensation was very common amoung the CEO's of the Big 5 canadian banks over the past few years. It helped to silence demands for claw backs of the very large cash bonuses paid to the bank CEO's over the last two to three years prior to 2008.
Canada's Finance Minister is famous for his inaccurate forcasts of growth or decline and resulting deficits. I will leave his opinion of Mr. Downe to your judgement.
I equally enjoy your insights and your carefully constructed opinions. Perhaps you might be interested in providing comments on my findings about RY ?