Howard Green: How a lesson from Charles Schwab almost 40 years ago helped Toronto Dominion become one of Canada’s top banks
It all started with Schwab. So Monday’s announcement that Charles Schwab is buying TD Ameritrade for US$26 billion is somehow fitting.
In the 1980s when Toronto-Dominion broke ranks with its Canadian competitors and decided not to buy an investment bank, it went the route of building a discount brokerage. And where did it look for a model? Charles Schwab, who started his in 1975. Those decisions ultimately led to TD moving from its perennial fifth place spot among Canadian banks to near the top of the pack—and Monday’s megabucks sale of TD Ameritrade to none other than Schwab.
TD’s initial discounter, Green Line Investor Services, was built by Keith Gray, a shrewd, dyslexic entrepreneur with no college education who grew up on a farm in southwestern Ontario. Green Line eventually grew to dominate in Canada, amassing approximately 70 per cent of the market. Gray recalled TD director and cable TV czar Ted Rogers telling him that with that kind of market share, he had only one way to go — down.
A large part of TD’s success can be traced back to Toronto-Dominion deciding in 1983 to model its discount brokerage on Charles Schwab
Rogers also told him to keep the business outside the bank to preserve an entrepreneurial spirit. Gray got similar advice from Schwab himself when he and another TD executive flew to San Francisco to learn from the American pioneer. Gray had positioned himself and his colleague as “just a bunch of hicks from Canada,” absolutely no threat to Schwab. But on behalf of the bank, Gray was soon buying up smaller discounters in Canada. In spite of resistance in the upper reaches of the bank, in 1996 he eventually snagged an American firm, Waterhouse Investor Services.
At $715 million Canadian (US$525 million), it was the biggest acquisition in TD’s history and top executives were nervous to make it work. But the timing was right. Boomers were buying stocks and building portfolios while online trading and investing were taking root. In 1999, at the height of the dotcom bubble, TD sold stock in its Waterhouse division, raising more than a billion dollars in a public offering, which would turn out to be extraordinarily meaningful.
In addition, purchasing Waterhouse resulted in a bonus for the bank. It had owned another firm (Knight/Trimark Group) that the bank subsequently sold for approximately the same amount as the purchase price of Waterhouse, meaning that acquisition had cost TD virtually nothing. “I can’t think of a transaction that created more value,” said Bob Kelly in an interview for my 2013 book, Banking on America, which chronicles the history of TD’s US expansion (Kelly had been CFO of TD and later CEO of Bank of New York Mellon).
The Waterhouse acquisition and IPO had occurred during the timeframe when the Canadian government had been faced with, and subsequently rejected, bank merger proposals. In 1998, RBC and BMO had tried combining, and shortly after that TD and CIBC followed suit. When the government turned them down, TD’s CEO Charlie Baillie asked federal finance minister Paul Martin whether the bank could buy Canada Trust instead. Martin told me for the book he’d been worried a U.S. financial institution might try to buy the trust company — and since TD was the smallest of the big five banks, Martin said yes. Canada Trust’s owner was interested in cash and TD had it from the Waterhouse stock offering and sale of Knight/Trimark.
By purchasing Canada Trust, TD vaulted from the number five bank to the number two bank. As part of the deal, it also got Canada Trust’s CEO, Ed Clark. He would later go on to run Toronto-Dominion and embark on a US$20 billion buying spree of American retail banks, eventually spreading the TD brand from Maine to Florida and making it a serious presence in the United States. In the midst of its U.S. expansion, in 2005 the bank swapped Waterhouse for the largest stake in a combined company with Ameritrade, creating TD Ameritrade. TD had become a player, coast to coast, in the U.S.
A large part of TD’s success can be traced back to Toronto-Dominion deciding in 1983 to model its discount brokerage on Charles Schwab. Imitation is said to be the sincerest form of flattery. So when the firm you’ve imitated spends US$26 billion to purchase a company you created in their image, it’s not a bad cap to the story.
Howard Green is the bestselling author of Banking on America: How TD Bank Rose to the Top and Took on the USA. His latest book is Railroader: The Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison.