BMO Capital Markets is staging a major U.S. expansion to gain market share at the expense of banking firms that were hurt by the financial crisis.
The investment banking arm of Bank of Montreal has added nearly 200 people to its U.S. operations since 2009. It wants to diversify its sources of fee income and it is largely targeting midmarket companies.
BMO Capital now has about 1,000 U.S. employees; the 200 new specialists brought on over the past two years accounted for 42% of all hires by its Toronto parent company, which has a market cap of about $34.2 billion.
The investment banking expansion has focused on corporate finance, equity capital markets, debt capital markets and municipal bonds. Thirty of the recent hires are directors and managing directors.
“If you’re one of the banks in Canada looking for growth and looking outside your home market, then the U.S. is a logical place,” Perry Hoffmeister, a managing director and head of U.S. investment and corporate banking, said in an interview at BMO Capital’s offices in New York.
“If your business at home is robust, then the U.S. is the next logical place, geographically and culturally.”
Hoffmeister has been a banking professional for more than 20 years. Before joining BMO Capital in April, he oversaw several groups at Lehman Brothers, including global telecommunications and investment, and he co-headed investment banking for Europe and the Middle East.
“Canada came out of the financial crisis in relatively good shape,” he said.
Several foreign banking companies have looked to capture a share of the U.S. investment banking business. Many of the Federal Reserve Board’s primary dealer companies are foreign outfits with investment banking aspirations, though BMO Capital senior managers would not say whether their parent would apply for primary dealer status with the Fed.
The investment bank is targeting businesses with market capitalizations of $200 million to $5 billion. Its net income for the year that ended Oct. 31 fell 6% from a year earlier, to $826 million, but its return on equity rose 3.2 percentage points, to 18.8%.
In the fourth quarter, it generated 25% of its parent’s $3.3 billion of revenue.
BMO Capital Markets’ priority sectors are metals and mining (a staple for Canadian investment banks), energy, food, consumer and retail products, though it also focuses on infrastructure, industrial, business services (including for-profit education companies), media and communications companies.
The midmarket that BMO Capital has its eye on had a jump in deal activity last year.
According to Thomson Reuters, midmarket mergers and acquisitions rose 29.5% in 2010. Fees generated from midmarket transactions hit $16.8 billion in 2010. Much of the activity — a 37.9% market share — involved U.S. companies.
Within the midmarket, last year’s dealmaking was heavily oriented to the financial and energy and power sectors.
Top M&A advisers for midmarket companies in 2010 were Houlihan Lokey, Goldman Sachs, Jefferies & Co., Lazard and Bank of America Merrill Lynch.
Hoffmeister said BMO Capital would “continue to invest in talent,” though he would not say how many people it would hire. It plans a major buildout in health care for the coming year, and intends to add to its business services and media operations.
“Health care is an area where there is a lot of entrepreneurial growth. Companies need growth capital and we expect lots of consolidation there as well.”
Michael Neuberger, who joined BMO Capital in December 2009 from Jefferies, is overseeing the health care effort.
Last year, BMO Capital advised Kinross Gold Corp. of Toronto on its $7.1 billion acquisition of Red Back Mining Inc. of Vancouver, British Columbia. The purchase, North America’s largest gold transaction since 2006, provided Kinross with what it considered a cornerstone asset: the Tasiast open-pit mine in the African nation of Mauritania.
BMO Capital has also built out its equity sales force, a process that began by augmenting its research team. That included combining research teams in Canada and the U.S. to better concentrate on industry sector coverage. Alan Tannenbaum, who joined the firm in October as head of U.S. sales and equity, said that before 2008 it had a strong research presence in Canada, but not in the U.S.
Now it has 32 published analysts covering more than 500 stocks that trade on U.S. exchanges.
Not surprisingly, BMO Capital’s push to build a name for itself as a source of research goes hand in hand with an effort to build up its equity capital markets business.
“We needed to build a research operation that was highly respected on the buy side, and we feel we have done that, and the next step is to build a distribution system around that platform,” Tannenbaum said.
“This provides the impetus for clients to want to interact with our analysts and salespeople, and we believe that correlates to market share.”
Hoffmeister said BMO Capital intends to bolster its strength in industrials as well as in banking and real estate.
“We’re good but understaffed” in those sectors right now. Financial institution groups are “a very important sector for us, but it is very broad with a number of verticals. We are expert in a number of those verticals including brokerages, exchanges, [futures commission merchants] and specialty finance companies. We intend to broaden this out.”
He also plans to augment another area he considers a strength: business services and media.
Last year, BMO Capital’s debt capital markets division closed 163 transactions worth nearly $90 billion (including 32 U.S. investment-grade deals worth $38.9 billion), and it acted as joint bookrunner on 12 transactions that generated $4.7 billion of proceeds.
