Genuity Capital Markets was launched five years ago this month, a debut that generated enormous buzz on the Street.
Executives at the boutique investment dealer have tried to stay low profile, yet the fascination continues. Talk on the trading desk these days is how employee-owned Genuity's shareholders might cash in on what they've built. The latest gossip, which comes with a fair amount of credibility, has privately-owned Genuity linking up with publicly-listed Canaccord Capital.
Talk of some sort of a deal with Canaccord follows on chatter that Genuity has been wooed by long list of suitors: Macquarie Group, Dundee Securities and various U.S. houses have all made overtures in the past, if there's any truth to chatter in Bay Street watering holes.
It's just the latest round of noise around an investment bank founded in part by a group of All-Stars who left or defected from CIBC World Markets in 2005, drawing considerable fanfare and a hefty lawsuit from the bank-owned firm.
In the absence of any formal comment from anyone involved, here's a quick sense of why a deal makes sense, and what stands in the way.
Genuity has exceeded expectations as an M&A, restructuring and corporate finance house, with its deal-makers building a lucrative advisory business among small, mid-ca and large cap Canadian corporations. Genuity's finest, most of whom are veterans of CIBC World Markets, would add to the reach of any independent dealer, none more so than Canaccord, with its small-cap roots.
Genuity's principals, led by CEO David Kassie, may want to cash in (the bankers call it monetizing) on their success: This crowd is influenced by the private equity mindset of taking profits within five to seven years of putting up cash.
The easiest way to monetize a privately-owned brokerage house is through a sale or IPO, and selling to a rival tends to translate into a premium price. Every successful dealer learns to renew itself by acquiring new professionals.
On the stock trading side, building a larger platform should translate into more traffic through one equity desks, which means better bottom-line performance for the dealer. However, banging together desks would mean dealing with considerable overlap. And that brings us to the biggest obstacle to a union of Genuity and any other firm: The issue of who does what at the combined entity.
The social issues, as bankers call them, have apparently been kicked around in the past by Genuity and Canaccord principals. Just who would run the combined firms and its various departments is far from clear, and those roles strike outsiders as the single biggest obstacle to any deal.
While the all-important people issues are opaque, or undecided, there is a little clarity on how Canaccord would structure the financial side of a Genuity acquisition.
The merger would be largely paid for in stock - at least 75 per cent of the price would be paid in paper, according to one source - and the total purchase would cost $120-million to $150-million, or just under two times Genuity's book value, again, according to chatter on trading desks. Genuity shareholders would need to wait several years for all of their Canaccord stock to vest, a standard feature in these arrangements.
Andrew Willis