stockmarket deregulation -- will be heard Tuesday when the Canadian
securities industry sets off its own fireworks.
    Some companies are quickly taking advantage of
deregulation, but more significant moves are likely to be a
year or more down the road, analysts say.
    They say most foreign firms will focus at first on bond
trading, debt financing and underwriting, areas in which they
have experience under the old rules that allowed them to
provide government debt financing and advisory services.
    "When they learn about Canada, they might go into retail,"
said Carney at Merrill Lynch Canada. "Then they will eventually
just start to buy up the little guys. If the bigger boys' price
comes down, they'll end up taking those ones over too."
    Under the new rules, barriers that kept banks, brokerage
houses, insurance companies and trust firms out of each others'
businesses will be swept away in favor of wide-open
competition.
    The deregulation, sometimes nicknamed "Little Bang," will
allow Canadian banks and other domestic financial institutions
to set up securities units or acquire existing brokerages.
    Foreign companies will also be able to form their own
securities divisions in Ontario or buy up to 50 pct of a
Canadian firm. A year from now they can raise that stake to 100
pct. Foreign firms that entered Canada after 1971 can currently
own no more than 10 pct of a Canadian brokerage.
    Deregulation was expected to generate a major shakeout by
June 30, involving mergers of existing firms and buyouts by
foreign and domestic financial giants.
    So far few deals have become reality, however, despite a
swirl of rumors and merger talks. In the heat of deregulation
fever, many Canadian investment dealers are demanding up to
four times book value, scaring off prospective suitors,
analysts said.
    "I would think they (the brokerages) will have to lower
their asking prices," said financial services analyst Jeff
Carney at Merrill Lynch Canada Inc., which recently terminated
talks to acquire prominent Canadian brokerage Burns Fry Ltd.
    "I think (a high asking price) is what scared Merrill Lynch
away from Burns Fry," added Carney. "It is just a lot of money.
When your asset walks out the door every night, it is difficult
to pay that amount of cash."
    Carney said another factor in the slow pace of buyouts was
uncertainty about the final deregulation rules, which were
issued and approved only in mid-June.
    Most major foreign and Canadian financial players have
focused their deregulation strategy on planning their own
Canadian securities units or buying seats on the Toronto Stock
Exchange, Canada's largest equities market.
    Japan's Nomura Securities Co. Ltd., Yamaichi Securities Co.
Ltd., Daiwa Securities Co. Ltd. and Nikko Securities Co. Ltd.
recently bought seats on Toronto's exchange, while United
States investment banks such as Salomon Inc. and Goldman, Sachs
and Co. have set plans for Canadian subsidiaries.
    The few proposed foreign investments in Ontario firms
include agreements by New York's Shearson Lehman Brothers Inc.
to raise its stake in McLeod Young Weir Ltd. to 30 pct from 10
pct and by the British firm of James Capel and Co. to acquire a
minority interest in Brown, Baldwin, Nisker Ltd.
    Several industry watchers predict the flood of foreign
acquisitions is likely a year away, when the newcomers become
familiar with Canada.
    Canadian firms will need such international alliances to
compete in the increasingly global securities market, industry
officials said.
    "That is one of the hopes of the regulators, that the change
will throw off one or two Canadian global firms," Toronto Stock
Exchange president Pearce Bunting told Reuters recently.
    Canada's six major banks are also expected to proceed
cautiously into the securities field.
    Analysts said the brokers are too expensive now while the
banks are coping with Brazilian loan problems. Banks will also
find it tough to merge their cautious, bureaucratic culture
with that of leaner, more free-wheeling securities dealers,
they said.
    While the banks have been approached by securities firms
seeking merger partners, they have not yet bought into
brokerages, choosing to build securities units from within.
    Last week, Royal Bank of Canada, the country's biggest
bank, ended merger talks with Canadian broker Wood Gundy Inc.
after several months of negotiations.
    But analyst Thompson forecast that if one bank finally
acquires an existing firm, "all the other banks will jump in.
    "They don't want to be perceived as missing out on
something," said Prudential-Bache Securities Canada Ltd. analyst
Albert Thompson, who believes that brokerages are too expensive
a risk for banks.
 Reuter
