Bank of Montreal buys US bank for $4.1B

By Rob Gillies
Associated Press / December 17, 2010

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TORONTO—The Bank of Montreal is buying a Milwaukee-based bank, the latest example of Canadian banks using their muscle to snap up U.S. financial institutions battered by the financial crisis.

Canada's fourth-largest bank announced Friday that it was acquiring Marshall & Ilsley Corp. for $4.1 billion in stock, doubling its presence in the U.S. from 321 branches to 695.

The news sent shares of M&I surging 18 percent, up $1.06, to $6.85, while U.S.-traded shares of the Bank of Montreal fell $4.40, or 7.1 percent, to $57.26.

Canadian banks, ranked the soundest in the world by the World Economic Forum, weathered the economic crisis far better than their counterparts in other countries. In a concentrated banking system dominated by five major players, Canadian banks have been looking across the border to find growth opportunities, casting an eye toward distressed U.S. banks.

The Toronto-based bank signed a definitive agreement with M&I to exchange 0.1257 Bank of Montreal shares for each share of M&I, which it values at $7.75 apiece.

"The timing is very good," Bank of Montreal President and CEO Bill Downe said in an interview with The Associated Press. "It certainly represents a very good value."

Downe credited a resurgent Canadian dollar and a healthy banking system in Canada.

"A strong and stable economy and a strong and stable banking system is extremely important in helping financial institutions. It has given us the benefits of lower loan loss provisions, higher capital levels and more consistent earnings," Downe said.

There are other opportunities for Canadian banks to do more in the U.S., Downe added. Most of the acquisitions have been smaller or mid-sized purchases in retail banking. Downe said acquiring investment banks makes less sense because investment bankers don't stick with the same firm for long and a stable corporate culture is important. The Bank of Montreal bought a small investment bank in New York earlier this decade but he doesn't see big investment bank deals being done.

Marshall & Ilsley president and CEO Mark Furlong acknowledged the deal is the latest example of a strong Canadian bank picking off a struggling U.S. bank, but he said it was also a good fit.

"To deny that we haven't been through some tough times in the last three years would be foolish, so absolutely we have. And I would say the Bank of Montreal has performed admirably through this cycle. Those are facts," Furlong told The AP.

Marshal & Ilsley was among the banks that participated in the U.S. government's Troubled Asset Relief Program, credited by many with averting an economic meltdown.

Bank of Montreal said it is buying all of Marshall & Ilsley's $1.7 billion TARP preferred shares and will repay them in full before the acquisition closes. BMO also said they've accounted for another $4.7 billion in expected loan losses.

The purchase bolsters the Bank of Montreal's presence in the midwest where it operates Chicago-based Harris bank. The combined operation will be the 15th largest banking group by assets in the U.S.

M&I is headquartered in Milwaukee and has $51.9 billion in assets. The bank has more than 190 offices throughout Wisconsin as well as locations in Indiana, Minnesota and other states for a total of 374 branches.

Bank of Montreal said once the transaction is completed, Furlong will become the CEO of the combined banks' U.S. personal and commercial banking business, based in Chicago. The transaction has been approved by the boards of both banks and is expected to close before July 31.

Many analysts have long been waiting for BMO to bulk up its U.S. assets.

"One of investors' long voiced complaints about BMO's strategy had been the lack of movement around its U.S. banking operations under the Harris banner," wrote Barclay's analyst John Aiken in a note.

"Strategically, the acquisition makes a lot of sense, given the geographic overlap of the core operations, principally Wisconsin and Indiana as well as broadening BMO's scope in other key regions such as Arizona and Florida as well as M&I's focus on mid-market commercial lending."

Toronto-Dominion Bank, Canada's second largest bank, has also expanded its U.S. presence in recent years with the purchase of New Jersey-based Commerce Bancorp and smaller, troubled banks in the Carolinas and Florida such as South Carolina-based South Financial Group. Earlier this year, TD agreed to buy the risky assets of three insolvent Florida banks worth $3.8 billion. Riverside National Bank of Florida, First Federal Bank of North Florida and AmericanFirst Bank were all purchased with the help of U.S. Federal Deposit Insurance Corp. TD didn't have a presence in U.S. six years ago, but now has about 1,300 branches in the U.S. compared to about 1,100 in Canada.

Canadian banks are investing in the U.S. from a position of strength. There was no mortgage meltdown or subprime crisis in Canada. Banks don't package mortgages and sell them to the private market, so they need to be sure their borrowers can pay back the loans.


Business writer Mae Anderson in New York contributed to this report