Canadian brokers roll up sleeves to meet US competition

Canada's Bay Street has decided it wants to look a lot more like Wall Street. Wood Gundy and Gordon Capital have announced a merger that will create the biggest brokerage house in Canada. The move is designed to stave off competition in global markets from giant American firms such as Salomon Brothers.

The newly formed firm even announced it will redesign its offices to look more like those of Salomon Brothers. It plans to have fewer offices, too, with more people working on one big trading floor here. Gordon Capital already has a similar operation.

The two firms have different styles. Wood Gundy is an old-line firm in the conservative Canadian mold. One former employee calls it stuffy. It does, however, have a large overseas operation and is the most active Canadian firm in the Eurodollar market.

Wood Gundy has been the second-largest investment firm in Canada. Its chairman, Edward Medland, was actively looking for a partner. ``If we didn't do a merger, I honestly think, no matter how good we were, we would have withered and died,'' Mr. Medland said.

Gordon Capital is a younger, more aggressive firm. It started in the 1960s as an institutional boutique and has moved up to become one of the top five dealers on Bay Street, the Canadian version of Wall Street. Gordon Capital pioneered such changes as the ``bought deal,'' by which the underwriter buys an entire issue, taking on the risk himself. Gordon has been burned a few times with this technique, but it has also driven down the cost of underwriting and scared a lot of old-line firms.

The chairman of Gordon Capital, James Connacher, said his firm could not have expanded without getting involved with a firm such as Wood Gundy, especially its cross-Canada branch network and its solid connection in the London market.

The new firm will start operating July 2. It will use the more established name of Wood Gundy Ltd., although Gordon Investment, the trading subsidiary of Gordon Capital, will remain active. It will have a capital base of $250 million (Canadian). The next largest firm, Dominion Securities Pitfield, has a base of $150 million.

There are plans to take the company public soon to increase its capital further. The Canadian investment business is undercapitalized and terrified of foreign giants. Salomon Brothers alone has about $4 billion (Canadian) in capital, while all 100 investment firms in Canada have a capital base of about $41.1 billion.

``Canadian investment firms must grow to a global scale,'' said Medland. ``To do this they must develop a much broader capital base and a stronger international presence.'' The new firm will have both.

While the deal is being called a merger by executives of Gordon and Wood Gundy, many in the investment community here see it as a takeover.

One former Bay Streeter now in England welcomed the deal, saying it puts new life into the once-stodgy Canadian financial community. ``It is a triumph for new blood and fresh imagination over the old school tie.''