Canaccord U.K. Acquisition Has Investors Worried

Canaccord Financial Inc.(CCORF.PK) has spent the past two years on an acquisition spree, capped off by a $400-million agreement Thursday to buy a London-based brokerage firm. Now, the focus is going to be on making all the businesses generate profits in a tough market.

The deal to buy London-based Collins Stewart Hawkpoint PLC is Canaccord’s largest-ever acquisition. It gives Toronto-based Canaccord, already Canada’s biggest independent brokerage, a company with 850 workers and businesses ranging from wealth management to stock trading to advising companies on mergers. It vaults Canaccord from a niche player in London’s financial scene to one of the biggest independents there.

Canaccord chief executive officer Paul Reynolds has now spent close to $750-million since 2010 buying businesses around the globe. It started in Canada with the acquisition of Genuity Capital Markets, and continued abroad with investments in China and Australia. The total outlay is close to Canaccord’s own market value.

The plan now is to cut back on acquisitions and try to squeeze more revenue and earnings from the stable of businesses that the firm has acquired, Mr. Reynolds said. The Collins Stewart deal should “significantly” add to earnings, he added. “We now have a global platform that very few people have,” Mr. Reynolds said in an interview from London, where he had traveled to close the deal. “Getting that model at peak performance is what we have to work to get.”

The prior acquisitions have mostly been in the investment-banking and securities business, where the focus is on raising money for companies and advising them on deals. With this latest purchase, Canaccord gets more of that. It also almost doubles its asset management business by bringing on a raft of U.K. brokers and the £8.1-billion ($13-billion) they manage.

The fee income from running that money should help steady Canaccord’s volatile earnings, which tend to rise and fall with the number of deals its investment bankers are doing. Still, investors signaled they are nervous about the size of the deal and the fact that it takes cash off the firm’s balance sheet at a time when capital is crucial for financial companies. Shares of Canaccord fell 8 per cent Thursday on the Toronto Stock Exchange.

“The wealth business provides needed diversification, but at this point shareholders want management to focus on making all of these moving parts work together to provide better returns,” said analyst Sumit Malhotra of Macquarie Capital Markets.

Financial firms around the globe have been building in wealth-management because of the consistent fee income. That has increased competition for top wealth assets.

Canaccord believes that buying in London, where markets are depressed, is a better option than trying to attract or buy brokers in Canada. At home, bidding wars for brokers have driven their compensation to levels that some in the industry say make the business unprofitable.

It makes more sense to add brokers in Britain, where they are paid less, with much more of their revenue flowing to the firms they work for, Mr. Reynolds said. A top broker in Canada will keep more than half of the revenue he or she brings in, and the firm covers a lot of costs. In the U.K., the broker covers more costs and keeps only about a third of the revenue.

“The margins are just that much better,” he said.