MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JUNE 22, 1998 (2)
Canadian Investment Community
New Owner Expected At Gordon Capital
HSBC, Onex seen as likely candidates
Gordon Capital Corp. was supposed to be Richard Li's beachhead in North America, but as his troops prepare to evacuate the Bay Street brokerage it is looking more like his Dunkirk.
Three years after the Hong Kong entrepreneur took control of Gordon Capital with the promise that he would transform the hobbled Toronto firm into a merchant banking powerhouse, it is still plagued by management turmoil, an exodus of talent and an inability to land lucrative investment banking deals. The continuing problems, combined with Mr. Li's preoccupation with real estate ventures in Japan and China, has prompted him to enter discussions to sell his 51-per-cent stake in Gordon.
According to sources close to the brokerage, Gordon could announce as early as this week that the firm has been sold.
"Gordon needs instant credibility in the market place . . . A deal will be done soon," said one person familiar with the discussions.
Ken Davidson, Gordon's chief executive officer, declined to elaborate on the company's plans. "We're just looking at various ways of strengthening the business."
The most likely buyer, sources said, is HSBC Securities, the investment banking arm of Hongkong and Shanghai Banking Corp. Ltd. , which has long-standing business ties to Mr. Li's father, Hong Kong business tycoon Li Ka-shing.
It is also understood that Toronto-based Onex Corp. , which is seeking to expand its merchant banking business, has had discussions with Gordon executives.
A spokesman for HSBC Securities did not return phone calls, and an Onex spokesman said "we don't comment on speculation."
Mr. Li confirmed that "we've been approached" by a potential buyer, but he sought to distance himself from Gordon, which accounts for less than 5 per cent of the business of his Hong Kong holding company, Pacific Century Group Ltd.
"I'm leaving it to the advice of the people in Canada," Mr. Li said.
It is this hands-off approach by Mr. Li, some former Gordon officials complain, that contributed to Gordon's decline.
Mr. Li was going to be the great hope for the firm, said one Gordon partner who resigned earlier this year. "But what Richard said and what Richard did were totally different things."
Mr. Li said he deliberately kept his distance from Gordon and rarely visited Toronto so that its managers could have the freedom to run the company as they saw fit.
"I've been leaving the management team alone. Whether they're doing 100 per cent the best job or not, they're trying their best," he said.
In October, 1995, sources said, Gordon's partners agreed to boost Mr. Li's minority stake in the troubled brokerage to 50.1 per cent, at virtually no cost, in exchange for assurances that he would use his money and business connections to help the firm land lucrative investment banking deals.
Mr. Li repeated his promises in the media, describing Gordon as a "beachhead" for North American investments in which he would contribute up to $50-million (U.S.) for each venture.
For a while, it looked as if Mr. Li might succeed with his plans. He moved in 1996 to check a succession crisis at the securities firm by hiring Mr. Davidson, a respected restructuring adviser with Canadian Imperial Bank of Commerce, to replace Gordon's retiring CEO, James Connacher.
Shortly after he arrived at Gordon, Mr. Davidson told employees his mandate was to rebuild a corporate finance team and advise Mr. Li on potential corporate acquisitions.
But for most of his first year, Mr. Davidson was preoccupied with advising Mr. Li about potential investments in the United States, none of which materialized, including a plan to acquire clothing manufacturer Esprit de Corp.
By 1997, Mr. Li's attention had shifted to Asia, where he was investing hundreds of millions of dollars in luxury office and housing developments in Beijing and Tokyo. In the meantime, Gordon was slipping off the charts in Canadian corporate finance deals. A firm that ranked as the country's third-largest underwriter of securities in the 1980s was not even in the top 10 by 1997.
Gordon's biggest problem was lack of talent in its corporate finance division. Too many senior investment bankers had fled during Gordon's troubles in the early 1990s, and by the time Mr. Davidson arrived, the firm no longer had the cachet to lure big producers from its competitors.
Mr. Davidson's solution to the problem was to offer a salary of nearly $2-million a year, guaranteed for two years, to each of three corporate finance experts, thus recruiting Brad Cameron from Lehman Brothers Canada Inc., Chris Burley from then Smith Barney Canada Inc., and Rod Baker, son of Gordon founder Neil Baker, who moved from his family's private firm.
With the new team in place, Mr. Davidson told a number of his associates, including Mr. Li, that "Gordon's problems have been fixed."
But Gordon was anything but fixed as far as its partners were concerned. The maverick firm had earned its reputation as an aggressive and innovative securities house by paying huge bonuses to those partners that reeled in the business. There was no such thing as a guaranteed million-dollar salary. One partner who left just after the trio arrived called the guarantees, "A recipe for disaster."
Another former Gordon partner concurred. "The guarantees were a fundamental strategic error, since it is an open question as to whether these three newcomers can justify the packages."
Then Mr. Cameron, who is co-president of Gordon, made sharp cuts in the corporate finance department, terminating 17 individuals. The move is now being second-guessed, with one former partner adding that Gordon was left with "very little bench strength."
In the meantime, departures of high-level people continued. Bob Barootes, Gordon's head of equity sales, whom Mr. Davidson recently described as a key executive to the company's future, left last month for Midland Walwyn Inc. In January, a four-person oil and gas team in Calgary also moved over to Midland, taking with them such valuable business as adviser to Calgary-based Pinnacle Resources Ltd. when it was taken over by Renaissance Energy Ltd., also of Calgary, earlier this month.
Despite the setbacks, Mr. Li seeks to put the best face on his Gordon investment. "We are not souring on Gordon Capital. It is not the highest, most successful piece within our group, but no, we're not souring."
Green Proves There's Life After Gordon
The Financial Post
Six months after leaving Gordon Capital Corp., Jeff Green, Gordon's former chairman, has returned to the business as chairman of a different firm -- Kearns Capital Ltd.
Kearns Capital was formed in early 1996 by Helen Kearns, former head of institutional equity sales and trading at Richardson Greenshields of Canada Ltd. The 12-person firm focuses on telecommunications, industrial technology and lifestyle companies.
Adding Green means a round of title adjustments. Kearns becomes chief executive and president, while former president Marvin Wolff moves over to chief operating officer.
Green, who spent almost 18 years at Gordon, said Kearns "is small, focused, with a big reputation. We can move Kearns Capital to its next level of success. We can be selective on the business we do. This is a great platform because the firm has achieved a great reputation."
"Jeff is coming here to help build the firm," added Kearns. "He brings a tremendous skills set to help us with that objective."
The firm's institutional clients have been well rewarded for investing in such companies as ATI Technologies Inc., Mitel Corp., Northern Telecom Ltd., Sleeman Breweries Ltd. and Westaim Corp.
Mark Lucey, a managing director and head of the Kearn's telecommunications group, said the firm "built up our niche and reputation through research. Jeff will help us move to the next stage in our growth, which will see us match our research stage with our execution capability, particularly on sales and trading."
Notes from a watering hole
The event is a recent corporate golf tournament. In the bar -- after the golfers, including several hackers, have finished a most enjoyable Texas scramble -- are groups of investment bankers, equity sales and trading pros, money managers and financial executives from issuing companies. Conversation flow easily as the golfers relive some of their great and not-so-great shots, and after a while the talk turns to what's happening in the brokerage business.
"I hear Gordon is down to the final three bidders."
"Who are they?"
"The Gordon guy wouldn't say, but the talk is HSBC Securities is the lead candidate. Onex is sniffing around and I hear that Newcrest is interested."
"Why Newcrest?"
"There are a number of Gordon people at Newcrest, so they know the firm."
"But that's not a reason to buy Gordon. Wouldn't Newcrest be better off to hire the people from Gordon they wanted? It would be cheaper."
"Probably, but the talk is that Newcrest is there."
"I thought Merrill was trying to buy Newcrest."
"I know for a fact that Merrill approached them a while back and they were turned down. That was different from a recent overture from Loewen Ondaatje, which talked to Merrill about buying them. Also, when Newcrest was being formed, it approached Morgan Stanley to see if it wanted to do a 50/50. So Newcrest is interested in that North American link."
"But I thought Newcrest was formed because the founders got sick of big firms with all those meetings."
"I played with a Newcrest guy today and he said he's heard the Merrill rumor is heating up."
"But I thought Merrill is buying Midland Walwyn."
"I hear it's Salomon Smith Barney."
"So why would Onex want to buy Gordon?"
"Three reasons. Ego -- if you're good you could turn it around. It's got name recognition. And it's got cash in the system and connections to Li Ka-shing. Maybe Gerry [Schwartz] feels he can get some links in Asia."
"But doesn't Onex need to have good connections with all of the Street?"
"Maybe Gerry thinks he can do a Ned Goodman, like taking Eagle & Partners inhouse. Ned controls a lot of issuing companies and he pays a lot of fees to the Street. Eagle will allow him to capture some of those fees. He's seen what Jack [Cockwell] did with Trilon."
"Doesn't Canada Trust have the best chance with Gordon because it owns part of Gordon Private Client Corp.?"
"They tried to do that deal, but couldn't agree on price."
"So why is HSBC the leading candidate?"
"Ask that guy over there. My feeling is that it's a Hong Kong thing."
The dinner bell rings, the golfers head for dinner, a few more drinks and a few more rumors.
Biggest Brokerages
Globe & Mail - Tuesday, June 23, 1998
Retail sales forces at Canadian investment dealers
RBC Dominion1,650
Nesbitt Burns1,400
Midland Walwyn1,275
ScotiaMcLeod800
CIBC Wood Gundy700*
L‚vesque Beaubien Geoffrion700
TD Securities385
Canaccord Capital300
Goepel McDermid246
Edward D. Jones130
Merrill Lynch16,000 (worldwide)
* CIBC Oppenheimer has another 650 U.S. stockbrokers.
Ken Thomson Places 7th Spot On Forbes Richest List
Only Canadian named has net worth pegged at US$14.4 billion
The Financial Post
Like any other working stiff, most days Ken Thomson, chairman of Thomson Corp., goes to his office in a dowdy Toronto office tower, puts in a day's work and heads home -- though in his case, admittedly, home is a neo-Georgian mansion in the expensive Rosedale neighborhood.
Instead of playing polo, Thomson oversees his business empire and entertains himself with such pursuits as writing the occasional column for a newspaper, like one in February deploring the "clutch-and-grab goon approach to hockey."
At 74, that dedication to duty and a healthy surge in the estimated value of his net wealth earned Thomson the No. 7 spot on Forbes magazine's list of the world's working rich.
Thomson climbed the list this year as a result of several unrelated factors. Forbes said his net worth increased by US$3.4 billion to US$14.4 billion during the year, the result of strong performances by all three of his businesses: information publishing, newspapers and travel.
His ranking was also helped by the fact that, for the first time, Forbes restricted the list to the working rich, eliminating coupon-clipping polo players and ignoring royalty and heads of state. In addition, Asia's financial collapse knocked the stuffing out of that region, opening up the field for North Americans and Europeans.
Still at the top of the list is Bill Gates, chairman of Microsoft Corp., whose net worth is estimated at US$51 billion this year, up from US$36.4 billion in 1997.
The late Sam Walton's family came second with net worth of US$48 billion followed by investment guru Warren Buffett with US$33 billion. Another Microsoft billionaire, Paul Allen, was in fourth spot with US$21 billion.
Thomson, who politely declined to be interviewed about the ranking on the ground that some things are better left alone, was the only Canadian in the Top 25.
Thomson's wealth, in particular the skill he has demonstrated in overseeing its management since his father died in 1976, is impressive.
The value of his father's estate was estimated at US$1 billion. Roy Thomson would be proud of, perhaps even astounded by, his son's management.
Ken Thomson has produced an average annual return during the past 22 years of about 13%, while the Toronto Stock Exchange 300 index returned 9% and the Dow Jones industrial average 10.4%.
"The track record stands for itself," said one analyst who commented on condition of anonymity. "The shareholder value, the cash flow growth, the transformation of the business, have been done very capably by professional management."
Although Thomson was chairman during this period of growth, at his side was John Tory, scion of a Toronto legal dynasty, who had been handpicked by Roy Thomson to help manage the fortune he built.
Tory's business relationship with the Thomsons goes back 44 years, Ken Thomson said in an effusive and emotional thanks to him at the most recent annual meeting.
Roy Thomson and Tory "got along like a house afire. It fascinated me to see a young man exert such an influence on my father who was much older with his Horatio Alger background and his extraordinary
driving ambition and self-confidence."
Tory, 68, and Ken Thomson transformed Roy Thomson's collection of newspaper, radio and odds and ends companies into an international information publishing company that is earning high margins. Thomson Corp. seems well positioned to prosper in the next century when Thomson's three children, David, Peter and Lynn will eventually take over.
Thomson and Tory, in their first major corporate move a few years after Roy Thomson's death, bought control of Hudson's Bay Co., a Canadian icon that coincidentally turned up in the 19th century paintings of early scenes of Canadiana by Cornelius Krieghoff for which Thomson developed a passion.
Although Thomson's retail adventure never proved to be as lucrative as initially hoped, it also never came as close to bankruptcy as that of the Eaton family, Canada's pre-eminent retail family.
After Hudson's Bay, Thomson and Tory sold an interest in North Sea oil development at a time that proved to be nearly ideal. This year, Thomson Corp. sold another remnant of Roy Thomson's haphazard investment legacy when it did a public issue of its travel division for US$4 billion, a top-of-the-market price according to some analysts. The Thomson family itself retained a personal holding of 19% in the travel business.
In addition, they have diversified the company from its initial dependence on newspapers into the non-advertising dependent field of information publishing, which involves the collection of highly specialized information that professionals require to carry on their practices.
While the modest, soft-spoken collector of Krieghoffs would be the last to lay claim to the company's success under his stewardship, he must be accorded at least some of the credit.
"The owner of a company has a choice between managing himself or leaving it to professional managers and making sure they do their jobs," said the analyst. "Thomson left it in the hands of professional managers. He made a very good decision."
Regulators Try To Make Life Simpler
The Financial Post
Securities regulators have asked for comments on a new system that will streamline the approval of prospectuses and other documents, eliminating much of the delay and duplication that come from operating in multiple jurisdictions across the country.
The Canadian Securities Administrators, which represents all provincial securities commissions, published a memorandum of under standing yesterday for what it calls a mutual reliance review system. This would apply to filings of prospectuses, including those for mutual funds, initial annual information forms and some registration documents.
Under the new system, a company looking for approval of a prospectus, for example, will still have to file in every jurisdiction where it does business. But only its home province will get a chance to review the prospectus in detail.
Each province will still get the chance to accept or reject the filing, but because the review is conducted by only one, the process will be much quicker.
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