TD Bids for Canada Trust

Edmund Clark is accustomed to trouble. Clark, 51, a career civil servant and financial services manager, was once nicknamed "Red Ed" for his role as one of the federal bureaucrats who designed the Trudeau government's National Energy Program in 1980. Before that, he says, "I wrote the 1979 budget that got Joe Clark [no relation] defeated." All of which got him publicly fired by the Brian Mulroney government after the Conservatives returned to office in 1984. In the late 1980s, Clark landed what looked like a top-notch management post, as chairman and chief executive of Financial Trustco Capital Ltd., only to find himself smack in the middle of a government bailout. Next, he was hired to help run CANADA TRUST, the nation's biggest trust company. There, he proceeded to buck every trend in the business, setting out to show that the banks were wrong in deciding that old-fashioned customer service was no longer the way to make big money.

When Clark joined Canada Trust in 1991, the company was active in many of the same business segments as the big banks. Under Clark, who became president and CEO of parent CT Financial Services Inc. in 1994, Canada Trust got out of everything that did not involve retail customers: corporate lending, commercial mortgages and wholesale car financing. He dumped them all to focus on finding out what retail customers want, and how best to deliver those products and services. Canada Trust sells an assortment of financial products, Clark says, but it has also insisted on continuing to provide plain, unfettered service. Says Clark: "When I go to the teller and all I want is 40 bucks out, I don't want to be harassed about whether I have bought my mutual funds."

He has also spent his years at Canada Trust urging Canadians to do business with his trust company rather than a chartered bank. Two summers ago, after the BANK OF NOVA SCOTIA bought National Trust, Canada Trust launched an advertising campaign that said: "You woke up one morning to find your trust company was being bought by a big bank. We should talk." How ironic, then, that Clark's trust company, if Ottawa gives its blessing, will be absorbed by TORONTO DOMINION BANK - and that Clark, who is to become chairman and CEO of TD Canada Trust, the merged retail banking operation, has been sent forth to help explain and defend the takeover. "You might say," he told Maclean's, "that I am no stranger to controversy."

It is not as if Clark could have done much about it. TD's $8-billion offer to buy CT Financial, unveiled early on Aug. 3, is startling only in the amount TD is paying. ("It's incredible money," Clark says. After deducting some of Canada Trust's surplus capital from the purchase price, TD will lay out $6.8 billion in cash.) The sale itself, on the other hand, was seen as inevitable. After the 1998 bank merger proposals were turned down, all eyes turned back to Canada Trust, the country's last large independent trust company. CANADIAN IMPERIAL BANK OF COMMERCE had been trying to buy Canada Trust for years. But TD chairman Charles Baillie got there first, it seems, and was willing to pay the asking price. TD negotiated an exclusive agreement with British American Tobacco PLC, which controls CT Financial's parent, Imasco Ltd. of Montreal.

The TD-Canada Trust deal is part of a sweeping reorganization of BAT's Canadian holdings. BAT, the world's second-largest tobacco company, is in the process of taking Imasco private in what, at the moment, is a $10.3-billion exercise. The 97-year-old British conglomerate wants to keep its Canadian cigarette business, Imperial Tobacco Ltd., and sell off Canada Trust and Imasco's other assets, including Shoppers Drug Mart Ltd. and Genstar Development Co., a San Diego-based real estate company. "What's happened here is that BAT has decided it wants the tobacco and it's going to sell Canada Trust," Baillie says. "So somebody was going to buy it. I can make a good case that it should be us rather than somebody else."

Clark agrees, as far as the choice of partner goes, even though TD has been the most aggressive of all the Big Five banks in weaning customers away from face-to-face service. Clark thinks TD has seen the light. But, he says, it will take a great effort to educate the bankers about customer service. "A lot of our discussions," he adds, have involved "trying to explain to them that you can't just change the name on the door. You have to change the way the organization is run and the way people are employed and the way they think about their business."

Canada Trust customers are not optimistic that their company's methods will prevail once it wraps itself in TD green. "I was once a customer at TD and I wasn't happy with the service so I came here to Canada Trust," says Noah Khamis, visiting the Canada Trust branch in Vancouver's Point Grey neighbourhood. "Here they treat me as more than a customer. They ask how my day is going and that means a lot to me. They are interested in me on a human level." Consumer and small business advocates all expressed concerns that the last major financial services alternative is about to disappear. Says Robert Kerton, spokesman for the Consumers Association of Canada: "We've got a situation where TD is paying for reducing the competition in the marketplace, all the other banks benefit, and the big loser is the customers."

Canada Trust clients worry that the branch network will be cut back. TD says it will reduce the combined workforce of 43,400 by 6.7 per cent, or 2,900 positions, over the next three years, plus 2,000 jobs that are expected to disappear through attrition. Fully one-fifth of the merged organization's 1,342 branches are slated to close. "They say they will keep most locations and stay open the same longer hours for a year, but after that there is no guarantee," says Toronto cab driver Boulos Karram. Library technician Brenda Maxwell, who switched to Canada Trust 13 years ago, says the takeover makes her sad. "I thought they'd hold out." If service starts slipping, she will have to shop around again, but "I don't know who I'd go to," she says. "I may try to find a credit union."

For the time being, customers can take limited comfort in the fact that there are many hurdles for the deal to clear. BAT and Imasco shareholders must approve BAT's offer for the 58 per cent of Imasco it does not own - something Imasco executives and shareholders are already complaining about, in the hope that they can squeeze a better price out of the foreign tobacco giant. BAT says it would raise its offer only if Shoppers and Genstar - which will be sold to the highest bidders - fetch more than the value BAT has put on them. Only after those deals are done can the sale of Canada Trust be completed, because they will determine what BAT can afford to pay for Imasco. BAT must buy Imasco before it sells Canada Trust; otherwise everyone involved would pay a fortune in taxes. Even if it all goes according to the TD's plan, it will not finalize the purchase until February.

What, so far, is the verdict? Stock markets were acting last week as if nothing out of the ordinary was going on. Imasco was trading below BAT's $40-a-share offer, but Toronto traders say they expect the price to rise to $43 or even $44 over the next few weeks as hardball negotiations unfold between BAT and Imasco's other shareholders, led by Imasco president and CEO Brian Levitt.

TD shares followed an age-old stock market pattern: they rose on the rumours and fell on the news. The day Martin rejected the proposed merger of the Royal Bank of Canada and Bank of Montreal, as well as TD's own amalgamation with CIBC, TD chairman Baillie phoned BAT chairman Martin Broughton. "I said that our mergers had been turned down, so I was a free agent," Baillie laughs, "and the TD was interested in Canada Trust." Nobody keeps a secret this long, so the word was all over the street by March. When the actual announcement was made, investors apparently decided to treat it as anticlimactic.

For the TD, of course, it is quite another matter. Coming on top of their success in the discount brokerage business, the takeover agreement is a huge coup for Baillie and his team. It will vault them from No. 5, when measured by assets, to the No. 3 bank in the country, ahead of Bank of Montreal and Bank of Nova Scotia. Absorbing Canada Trust will also increase the TD's chance of being able to afford to expand into the United States. "The stronger we make this bank, the more likely we are to remain headquartered in Toronto, rather than being bought by someone south of the border," says Baillie. "We can be an acquiror rather than an acquiree."

The Charlie Baillie who unveiled the Canada Trust deal bears little resemblance to the man who, in April, 1998, reluctantly set out to persuade Canadians that he really wanted to merge with CIBC. "With the last one, I was reacting because the two other banks got together and they were going to be so large," Baillie said in an interview. "I felt the only recourse we had was to try and get as close to them as we could, and so we went ahead." He now says he would never have arranged a merger before the federal task force on the future of financial services handed down its recommendations, unless he felt pushed to the wall. "So that one was tough. But this one," Baillie adds, beaming, "is my initiative and I'm pursuing it and I'm much more confident that it will go through."

It seems that the only thing that makes Baillie nervous these days is talking about Finance Minister Paul Martin. "I guess all I'll say is that I've come away from those conversations and I still want to do the deal," Baillie says. Because Canada Trust is not a bank, this proposal will not be subject to public review, which makes everything easier. "I'm encouraged. I haven't been discouraged by my conversations with him," he says. "I can make a good case that it should be TD because it is the smallest of the Big Five banks. It changes the competitive landscape the least," he argues. "But other than that I would rather people asked the minister."

Aside from issuing a bland three-paragraph press release stating that the merger will have to be approved by the competition bureau and the Office of the Superintendent of Financial Institutions Canada, Martin has made no comment on TD's plans. But they came as no surprise. Unlike last year's merger candidates, the TD has gone to great lengths to make sure Ottawa was kept in the loop - thereby, it hopes, heading off political opposition. Baillie and his executives met with Martin two weeks before the deal was announced to outline their plans, and also met in advance with Liberal MPs from London, Ont., to offer assurances that the city where Canada Trust was born will not lose any of its 2,000 jobs. One Martin adviser suggested that the meetings have been crucial: by getting MPs on side, the TD hopes to avoid the sort of backlash that helped sink the 1998 bank mergers.

Clark - who, under his contract with CT Financial, will be paid a minimum of $7.8 million if the deal goes through - is willing to venture further. "I still have a lot of friends up there," he says, meaning the federal finance ministry. "The feeling is that this deal would not have been allowed to go on as far as it has if Mr. Martin didn't want it to go ahead. If Mr. Martin was generally opposed to it, that message would have been given." And as for maintaining customer service, Clark says it makes no financial sense for TD to pay so much money and then dismantle everything that makes Canada Trust so valuable. Baillie, he adds, is convinced that TD has to make the shift to retail. "He's betting his career on it." Otherwise, he says, "I can't guarantee. What I would say is try us; watch us; and if we've started to slip, punish us," Clark concludes. "I think what will happen is that if we don't fill the gap, someone else will." In which case, Red Ed may find himself in hot water yet again.

Wooing the Consumer

In the early days, automated tellers unnerved many customers. In 1983, Canada Trust unveiled its version of the technology - called JohnnyCash machines - with the country singer of that name on hand for promotional appearances. This hokey but smart marketing was designed to make the machines less intimidating. It also struck a chord of consumer friendliness - the quality on which Canada Trust has built and staked a name. Over the years, the trust company has won over customers with a string of innovations, including the following:

1967 Becomes the first to introduce computerized savings accounts, allowing customers to bank at any branch.

1976 Extends banking hours, staying open between 8 a.m and 8 p.m.

1977 Offers daily interest on savings accounts.

1982 First with a six-month open mortgage.

1984 Introduces tiered interest rates on savings accounts - the higher the balance, the higher the interest rate.

1985 Offers a line of credit accessible by MasterCard called PowerLine. The interest rate was, and is, four to five points lower than the going credit-card rate.

1986 Becomes the first to slash MasterCard rates from about 20 per cent to about 16 per cent.

1993 Offers the 90-day no pay mortgage, allowing borrowers to skip mortgage payments for the first three months.

1994 It is the first national financial institution to introduce paperless banking. Customers can bank without filling out deposit or transaction slips. Also begins offering 24-hour, seven-days-a-week telephone banking in Cantonese and Mandarin.

1996 Offers coast-to-coast banking by personal computer.

1998 Launched Canada's first biodegradable credit card, which looks and feels like plastic but is made from a plant-based material.

Maclean's August 16, 1999