1010 Class 11: Confederation Life and RBC

1. 1010 Class 11: Confederation Life and RBC

2. Tonight Exam is 7-10 PM December 22 in TM TMEW You have 3 hours to complete this final. Cumulative, cases can be from the start of the year There are 3 cases. Choose 2 of the 3 and answer the questions. It is open book.

3. Confederation Life When regulators seized Confederation Life in 1994 the company has $11b in assets and was the 4th largest insurance company in Canada. Previously, when we talk about the failure of large companies, we are told than an entity is �too big to fail�.

4. Too Big to Fail What does this term mean? Is means that the financial position of the company in the market is so large, that its collapse could bring down the entire financial system Recent examples, Lehman Brothers, LTCM, Fannie May and Freddie Mac.

7. History Confederation Life was founded in 1871 by a Scottish immigrant. In 1985 under the guidance of a new CEO Pat burns, he challenged the management of Confederation Life to become more entrepreneurial. Destination � Financial Services This sometimes ends in pain as with expansion, comes risk

8. History In 1987, the Government of Canada changes the rules to allow anyone to acquire securities dealers and brokerage houses. The merger game was afoot.

9. Reaction from CL Confederation Life reacted to the increased competition from the banks ,buying 10% on Midland and 100% of Halifax Trust

10. Reaction from CL �We are not who you think we are. We are not afraid of the competition. We are ready to take on the world � which by the way includes the big banks.� Pat Burns Jan 1990

11. Overextended at the Wrong Time The recession of the 1990�s was a bad one. When they hit, loans do bad and people don�t buy life insurance. That left Confederation Life undercapitalized.

12. Undercapitalized Undercapitalization refers to any situation where a business cannot acquire the funds they need. Aka. Broke In 1992 CL was $1.5b short of its obligations

13. Outcome �every time they�d turn over a rock, they would find a snake� The OCFI in 1994 decided to take control of CL under the Winding-Up Act. The sized the assets and liquidators disposed of the company.

15. RBC RBC is the Largest Bank in Canada with $429b in assets. The total sector is 1.7 trillion in size

16. RBC Mergers In 1997 John Cleghorn the CEO of RBC went to a Christmas party where he met with the CEO of BMO. Then and there they decided to merge �eggnog agreement�

17. Why? Merger fever had gripped financial institutions south of the border. The big Canadian banks decided that in order to remain competitive they needed to be in the game as well.

18. RBC�s Routes to Expansion Internal growth Acquisition Alliance (Merger) RBC Choose merger.

19. Acquisitions Is a tool that companies use to grow, but not always to grow profitably. Why? Implementation often fails. Government

20. RBC�s Key Issues in Acquisitions Pre-acquisition Planning Post-acquisition Integration

21. Key Issues in Acquisitions Pre-acquisition Planning (Strategic Motives) Industry restructuring Increased market power Access to new markets Economies of scale and scope Acquisition of new skills Diversification

22. What Was RBC�s? Pre-acquisition Planning (Strategic Motives) Industry restructuring Increased market power Access to new markets Economies of scale and scope Acquisition of new skills Diversification

23. Key Issues in Acquisitions Pre-acquisition Planning (Financial Motives) Buying a bargain Tax Advantages Financial advantages (tax laws, acheive a listing, cash flow)

24. Key Issues in Acquisitions Pre-acquisition Planning (Strategic Issues) Avoid �sprat catching� or buying small companies as management will tend to ignore then and they will underperform. The risk of failure increases as market share decreases Avoid financially weak companies

25. RBC: Key Issues in Acquisitions Pre-acquisition Planning (Strategic Issues) Avoid �sprat catching� or buying small companies as management will tend to ignore then and they will underperform. BMO #5 The risk of failure increases as market share decreases Avoid financially weak companies

26. Key Issues in Acquisitions Pre-Aquisition experience is only useful in so far as knowing what not to do based on your errors of the past.

27. Why Acquisitions? Experience suggest that only 50% of acquisitions are a success. So why do they go ahead?

28. Why Acquisitions? CEO Ego Process Issues (non-strategic decision making) Environmental Pressures (the pressure from bank mergers south of the border.

29. Pre-acquisition Planning Selecting a target Be strategic Analyse your target Expose incompatibilities. Examine worth Explore regulations, aka government

30. Pre-acquisition Planning Doing the deal (Bidding tactics) Bidder needs to tell shareholders they will create more value for them. Attack current management .

31. Pre-acquisition Planning Defender tactics Revaluation of assets (raise the price) Improve profit forecasts Pac-Man (Launch a bid for the hostile company.)

32. Post-acquisition Integration Organizational Fit Acquisitions are often associated with substantial redundancies. Many layers are effected. Who will stay and who will go? Have you lost key employees? Who can tell? Post Acquisition Integration There can be culture clash post acquisition. The extent to which value can be created through resource sharing can result in four different types if integration.

33. Post-acquisition Integration Arms Length These are often in areas that are unfamiliar to the acquiring business. Intensive Care They are in poor financial shape at takeover. Subjugation The company looses its identity and is rolled into the parent. Often to gain market share. Collaboration Here there is a substantial interchange of capabilities.

34. Types of Acquisition Integration

37. Concluding Remarks In the end in December of 1998, Paul Martin the then Finance Minster of Canada said that the mergers between BMO and RBC was a No-Go and that it was not �in the best interest of Canadians� What type of ideology?

38. Thanks for the Term!