With the launch of its investment banking business, Commerce Bancorp of Cherry Hill, N.J., has once again shown its preference for building operations from scratch rather than buying them.
On Wednesday, the same day Royal Bank of Canada said it was acquiring Tucker Anthony Sutro for $625 million, Commerce announced that it had formed Commerce Equity Capital Markets with bankers and analysts snatched from one of the oldest regional brokerages in the country, Janney Montgomery Scott LLC in Philadelphia.
Commerce hired Michael J. Mufson, a co-director of investment banking at Janney, to head the equity capital markets group. Mr. Mufson, 47, in turn has brought in 18 colleagues from Janneys equity research, investment banking, and institutional sales groups.
Given the capital markets slump, it would seem counterintuitive to launch such a unit. But Commerces chairman and president, Vernon W. Hill 2d, said, I actually like to start new businesses when were in a downturn. You get a better pick of people, and you get to build your business based on lowered expectations, rather than inflated expectations.
Analysts agree that now is a good time for $9.3 billion-asset Commerce to enter the investment banking business, especially since it has minimized its risk by creating its own group instead of buying a full-service brokerage firm outright.
Its the type of endeavor where if it does not work out, you can let the people go, said John Kline, an analyst at Sandler ONeill & Partners in New York. Its not as if they went out and paid a huge premium and will have a deal fall flat on its face.
The corporate investment banking operation will be a part of Commerces capital markets division, which has focused mainly on government fixed-income investments. The new group will provide investment banking services, institutional equity research, and institutional sales and trading for middle-market and emerging growth companies along the East Coast.
Mr. Hill said he expects the entire capital markets group, which he said produces about 5% of the companys gross revenue, to make up about 10% of its revenue eventually. Its building all the time, and this is just another leg to building up higher volume, he said.
Mr. Kline also said the budding division should succeed. Unlike most community banks, Commerce has a very solid capital markets presence in the fixed-income area, the analyst said. Moreover, it is the No. 1 issuer of short-term municipal notes in New Jersey and one of the top ones in Pennsylvania, he said.
As a co-director of the investment banking division at Janney, Mr. Mufson has done 10 underwriting deals since last year, and he says he expects to do at least that many at Commerce in his first year and more the year after.
Mr. Mufson joined Janney in 1994 when it bought a boutique investment banking firm he helped found. He said the main reason he left Janney was that Commerce offered a better platform for building a group focused on emerging and middle-market companies.
We believe there is a business opportunity and a significant void for providing classical investment services and equity research to that marketplace, he said. Janney was not committed to building its investment banking group. Investment banking was an odd fit there.
For that reason, Mr. Mufson said he was certain Commerces new group, whose staff size he hopes to increase to 40 by yearend, will be able to compete for the regions corporate financing business. Theres plenty of business available, and Commerce will take its fair share.
Only a few banking companies of Commerces size have ventured into investment banking in recent years, and most of the others have done so through acquisitions.
In 1998 BankAtlantic Bancorp Inc. of Fort Lauderdale, Fla., bought Ryan, Beck & Co. of Livingston, N.J. Last year International Bancshares Corp. of Laredo, Tex., acquired a controlling stake in GulfStar Group of Houston. Last month CoBiz Inc. of Denver bought a local boutique investment banking firm, Green Manning & Bunch.
In addition to launching the investment banking operation, Commerce has been focusing on building its core banking business. It expects to open 32 branches this year alone, most of them in New York metropolitan area.
Mr. Hill said he expects the company to have about $23 billion of assets and 375 branches, most of them in the New York and Philadelphia markets, by 2005.
While he said that in the future Commerce will have its largest presence in the New York area, right now the majority of its branches 92 are in the Philadelphia area, while 70 are in northern New Jersey.