For the three powerful men who'd been summoned by Ontario Finance Minister Dwight Duncan, it seemed like an acceptable fate for Canada's largest stock exchange.
Mr. Duncan had serious concerns for weeks about the plan to marry TMX Group Inc. and London Stock Exchange Group PLC. So he asked the head of the Ontario Municipal Employees Retirement System, Michael Nobrega, to arrange the gathering with the heads of Ontario Teachers' Pension Plan and the Canada Pension Plan Investment Board. He wanted to know what some of Canada's biggest investors were thinking about the deal, given the Toronto bourse's omnipresent role at the heart of the nation's financial community since 1861.
To Mr. Duncan and other critics, the deal looked more like a takeover by the LSE than a marriage of equals. But the representatives of the three funds delivered a different verdict: Controversial as the deal had become, they could live with it, and they would not be standing in its way.
None of the pension CEOs wanted to give government an excuse to kill the transaction. They depend on being able to invest abroad, and having their home government adopt a protectionist stance might lead to international roadblocks on their own deals in the future.
It was the same reason executives at the Bank of Nova Scotia, which had been urged by their counterparts at three other major banks to join in publicly opposing the deal in a March letter, did not add its name to the cause. International acquisitions form a fundamental piece of Scotiabank's growth strategy and the bank, like the pension funds, worried about the damage that could be done if the deal was killed in the political arena.
Yet last week, there they were – Scotiabank, CPPIB and Teachers, along with six other banks and pension funds – banding together under the flag-waving name of Maple Group with an offer to buy TMX Group in a $3.6-billion deal that would trump the LSE plan by about 20 per cent.
What changed? Away from the public spotlight, a significant shift had taken place in a matter of days.
The tale of how some of Canada's biggest financial institutions allied in a deal that would keep the country's stock exchange locally owned, pieced together through multiple interviews with people involved in the formation of Maple Group, is one of different motivations but a common goal – taking control the TMX.
For the banks that were opposed from the beginning to TMX merging with LSE, including National Bank of Canada and Toronto-Dominion Bank, the Maple plan is driven by an urge to come up with another option. Simply complaining about the LSE-TMX merger wasn't enough.
"Sure we can go out and say we don't like the deal, which we did, but at the end of the day, so what?" said National Bank executive Luc Bertrand, who helped negotiate the deal and has since become the public face of Maple. "You can cry wolf but it doesn't do anything concretely."
For others, including Scotiabank and the pension funds, the motives are more purely capitalist. After a decade of growth, the TMX has stalled. They believe it can be a great investment again if new owners can boost profits by remaking the trading business in Canada in the mould of some of the world's most successful exchange companies.
There's also a deeper agenda. Some in Maple Group believed that the LSE deal wouldn't survive the government reviews that it faces in Ontario, Quebec and Ottawa. And even those who disliked it were loath to see government kill another transaction so soon after the federal government's decision to scotch the takeover of Potash Corp. of Saskatchewan last fall, because of the message that would send about Canada's openness.
"We're all commercial people and we want the government in our lives as little as possible," said a senior member of Maple, speaking on condition of anonymity.
That meant the private sector had to come up with a solution.
After weeks of work, the Maple consortium went public with that solution last week. The plan is to buy TMX for $48 a share in cash and stock, then to combine it with some other key pieces of the Canadian financial infrastructure, including TMX's biggest competitor for domestic stock trading, the bank-owned Alpha trading system, and the CDS Inc. clearinghouse to create a new power at the centre of Canadian finance.
Yet the solution brings many questions. It creates a dilemma for regulators who must decide whether having a locally owned stock exchange is important enough to allow a return to a near monopoly in stock trading. The plan also increases concentration in a financial services business already tightly controlled by just a few large institutions.
In some respects, the banks' proposal takes Canada back in time, to an era when stock exchanges were local operations owned by the firms that traded on them. It is a national solution in an increasingly international business – and for now, it would also have Canada sitting out the wave of global consolidation in stock exchanges.
It's for all those reasons, plus the difficulty of co-ordinating such a diverse group of bidders, that this is also a tale of a deal that almost didn't make it off the drawing board: Just days before the bid was unveiled, some of the biggest players were still unsure it could be done.
The opposition mounts
The Maple plan had its origins in the head offices of Toronto-Dominion Bank, National Bank of Canada and Canadian Imperial Bank of Commerce.
After the TMX-LSE deal was announced in early February, TD chief executive officer Ed Clark and National Bank CEO Louis Vachon came to share a deep-seated concern that the transaction passed too much control to London. Their long-term worry: That decision-making power over some key parts of Canada's financial infrastructure would slowly leak away from Canada, especially if the merged TMX-LSE were to go on and do more mergers.
There was also opposition at CIBC in the form of CEO Gerry McCaughey and Richard Nesbitt, the head of CIBC's securities arm and a former TMX CEO. Their stance was slightly softer: That the LSE deal could be acceptable if there were enough conditions. But the conditions they wanted were so tough that they would probably kill the deal.
The bankers began discussing ideas. That would yield the March letter authored by the banks that strongly criticized the TMX-LSE plan. But while the letter created a minor furor on Bay Street, it didn't have a lasting effect.
Meanwhile, another person was entering the picture. On Feb. 7, just a day before the TMX-LSE deal was announced, a new executive went to work at National Bank, settling into a desk in a historic downtown Montreal building where the bank's securities arm is based.
That executive was Luc Bertrand, who had built Montreal Exchange Inc. into a derivatives power before agreeing to merge it with what was then TSX Group Inc. to form TMX Group. He stayed on a while at TMX, but left after TMX gave the CEO title to an American newcomer, Tom Kloet.
He then went to work on another complex consortium deal, helping the Molson family buy the Montreal Canadiens. With that deal done, and now as a part-owner himself of the Habs, Mr. Bertrand took up National on an offer to join as a vice-chairman.
When the TMX-LSE deal was announced, Mr. Bertrand immediately dusted off the files he had from his days as an exchange executive. He had long held the belief that TMX, now with derivatives and stock trading, could be even more successful if it also had full control of the main clearinghouses in Canada. That so-called "integrated" model, where all the trading services in a particular country are concentrated in one company, is profitable and popular with investors.
"When the LSE bid came up, this concept came out of our file pretty quick again," Mr. Bertrand said in an interview, adding that the plan is something "Richard Nesbitt and I have been talking about for years." But, he admits, "it's a challenge to put it together."
Clearing is the plumbing that passes cash and securities back and forth between traders. It's a steady fee-earning business that investors love. It is not facing the vicious competition that stock trading is because it's much tougher to set up a new clearinghouse than to start a new trading system that can be bought cheaply off the shelf.
Stock exchange companies that don't have clearing trade at lower valuations. But long-standing distrust between the banks and the TMX stood in the way of ever doing a deal to create the integrated model that Mr. Bertrand envisaged.
TMX and the banks are partners in CDS, the biggest stock clearinghouse in Canada, which is now run as a non-profit industry utility. TMX executives have often tried to buy the banks' shares in CDS, but the banks would never sell, fearing TMX would use control of CDS to increase its fees.
In the trading business, the banks' relationship with TMX is also fraught with tension. They are TMX's biggest customers and they also own its biggest competitor. In 2007, believing TMX was overcharging, they launched Alpha Group, which hammered TMX at every opportunity and grew to become the second-largest stock market operator in Canada.
But the LSE deal created an opening to overcome all that – to try to create a single, integrated company for trading stocks and other financial instruments by merging TMX, Alpha and CDS.
That's the core of Maple Group's plan. But it means convincing regulators and customers that having a bank-controlled TMX with near monopoly market share is a better alternative than having a key piece of Canada's capital markets run out of London.
In many ways, the things that made TMX an attractive investment for the banks would also be the things that could be most troubling to competition regulators.
Alpha has been eating into TMX's market share in stock trading. TMX's two main markets, the TSX and TSX Venture Exchange, accounted for about 69 per cent of all trading volume in Canada last quarter. Alpha had grabbed about 20 per cent by offering discounts, and because its founding banks support it by sending orders there. Putting the two companies together would significantly strengthen TMX, but at the price of eliminating competition.
"They are going to have a lot of concentration of pricing power," said Alison Crosthwaite, director of global trading research at Instinet, a large U.S.-based brokerage.
TMX already owns a derivatives clearinghouse. Adding CDS and its stock and bond clearing business would enable big savings and new products as the systems were combined. But it would also concentrate ownership of clearing.
Choosing Maple over LSE would also mean Canada would be bucking the international trend of cross-border mergers in the exchange business, as big market operators seek to expand their product lines and cut costs.
"We run the risk that, in the global race, we fall behind," Ms. Crosthwaite said.
Despite all that, Mr. Bertrand and the other prime movers were convinced there was a deal to be done. Besides, the international side would come. Once the TMX was rebuilt in the new integrated model, it could play the consolidation game from a position of strength.
Engaging the pension funds
By mid-April, the idea for an all-Canadian alternative had a name: Maple. But CIBC, TD and National couldn't do it alone.
They needed backers, and they needed to assemble them quickly. The LSE and TMX had started the process of trying to get approval. The Maple group focused on Friday, May 13, as a deadline to avoid giving the LSE too much of a head start.
A few weeks before that date, the banks reached out to key politicians and regulators to give them a heads-up that a bid might be in the works. More importantly, they reached out to top executives at some of the country's largest pension funds, who were critical to the whole plan.
The pension funds would provide more than cash. They would add a cross-Canada flavour; participants such as Alberta Investment Management Co. would help counter the perception that it was just a cabal of banks from Toronto and Montreal trying to reassert its dominance over one of the few corners of finance they no longer controlled.
They funds would also provide cover with regulators, who could be concerned that the banks would return to the days of running the exchange as a private club. The banks, along with dozens of brokerage houses, owned the Toronto Stock Exchange when it had a monopoly on stock trading, before selling it in 2002. They were sensitive to the appearance of using the LSE bid as a cloak under which to rebuild that monopoly. Pension funds are bound by a duty to make money for their pensioners, so having them on board was seen as evidence of a deal driven by broader business interest.
The pension funds listened to the pitch and began to run the numbers. The only way funds like Teachers and CPPIB would participate is if they could make money. Patriotism came a distant second.
"We just view it as an investment and that's put as simply as I can put it," said Mark Wiseman, the head of investments at CPPIB. "We believe it will enhance the efficiency of Canadian capital markets, and we are the largest if not one of the largest participants in that market, and so we care about it very deeply."
At Scotiabank, insiders were doing the investment math, too, but hadn't made a decision on whether to join Maple.
Scotiabank was an important potential ally, but the bank's executives were wary of doing something that would look protectionist. They also worried that the competition issues might be too big.
The bank said it wanted to see other players get involved as proof that the idea was workable. As the pension funds signed on, Scotia did too.
The political factor
By the close of markets on Friday the 13th, the key players in Maple had finished their proposal. They presented it to TMX Group, hoping to give the company the weekend to mull the idea before a public announcement on Monday.
The group also knew it needed political suasion. The banks learned a hard lesson in 1998 when government leaders were caught off guard by proposed bank mergers, and the deals died in a morass of political opposition. This time, they hoped for a softer landing.
At the close of the markets that day, executives from Maple's backers fanned out to Ottawa and several provincial capitals to brief regulators and politicians on what was about to happen.
TD's CEO, Mr. Clark, dealt with Mr. Duncan, the Ontario Finance Minister. Mr. Bertrand telephoned Ottawa, while Mr. Vachon, National's CEO, held conversations with the Quebec government. Jim Prentice, the recently retired MP from Calgary who had joined CIBC's executive ranks, was tasked with the West. He reached out to legislatures in Edmonton and Victoria to inform them of the bid.
The conversations were brief, in some cases lasting only a few minutes. The banks asked for nothing, only to speak with the key people involved. When a receptionist in one Premier's office picked up the phone, she was told there was important information forthcoming that the Premier needed to know. The call was put through immediately.
Meantime, TMX was reaching out to the LSE to let its merger partner know about the Maple proposal. Xavier Rolet, the CEO of LSE, got word late Friday night London time.
The LSE and TMX bankers and lawyers were in high gear by Saturday, trying to gauge the implications of the Maple plan. They too focused on the competition question, preparing their arguments.
Word was beginning to leak to newspapers. TMX issued a release confirming the bid. Maple moved up its announcement to Sunday, and by the following morning, the sales job was on in earnest.
Mr. Bertrand was the public face of the bid, arguing that Maple's plan was a better deal for TMX and Canada, and that the competition issues were manageable. The timing could have been better, though: That same morning, Nasdaq OMX announced that its bid for NYSE Euronext, which would combine the two biggest U.S. exchange companies, had been scotched by competition regulators in the U.S.
Mr. Bertrand disputes the notion that the concentration would mean higher fees, arguing that the exchange and clearinghouses operate in a North American market and would lose business to rivals on both sides of the border. "When people say 'Oh you're going to crank up the fees,' well, how can we? BATS [an alternative U.S. stock market] and the New York Stock Exchange and those guys are going to eat our lunch. We can't do that."
For Mr. Duncan, the bank-led plan is the perfect solution. While he strongly opposed the proposed deal between the LSE and TMX Group, he said he was nervous about blocking it because that could send a message to international investors that Canada is not open for business.
"I believe in the free movement of capital, of labour," he said in an interview. "I don't want to impede that."
The bank-led bid would retain domestic ownership over what Mr. Duncan says is a strategically important asset.
"Why shouldn't we be taking the lead in this?" Mr. Duncan said. "This is very much a market response. It's not a government fiat."
Grant Robertson
Karen Howlett
Tim Kiladze