Canadian Banking Giants Plan Merger

Two of Canada’s biggest banks, Royal Bank of Canada and Bank of Montreal, said Friday that they plan to merge, and the deal met swift resistance from the government.

In an announcement that stunned the Canadian government and financial markets, Royal and Bank of Montreal said they would merge in an all-stock deal they valued at $26.2 billion.

Combining the country’s biggest and third-biggest banking companies would create a financial institution with assets of $310.3 billion, ranking it third in North America, behind Chase Manhattan Corp. and Citicorp.

It would be by far the biggest merger in Canadian corporate history and the country’s first major bank combination since 1961.

It’s also the first test of a 30-year-old law that restricts mergers among Canada’s six major banks.

As the banks were holding a news conference in Toronto to outline the deal, Finance Minister Paul Martin fired off a terse statement saying he would not consider approving the merger until after a government task force on the future of the banking industry completes a report in September.

A clearly angry Martin later told reporters that the banks’ actions were “somewhat premature.” He said he only learned of the deal through a news report.

The Canadian government formed a committee in December 1996 to report its findings on the future of the nation’s financial services industry, including whether Canada’s six biggest banks, which already own most Canadian trust and brokerage firms, should be allowed to merge with one another.

Royal and Bank of Montreal contend their merger was needed for Canada’s banking sector to remain competitive. Canadian banks have declined in size relative to their global competitors amid a string of mega-mergers in financial services.

“We are creating a Canadian bank that can go head-to-head with any bank anywhere,” Bank of Montreal Chief Executive Matthew Barrett told the news conference. “What we don’t plan to be is the corner hardware store, waiting for Home Depot to put it out of business.”

In New York, the announcement sent Royal shares up $2.56 to close at $52.13 and Bank of Montreal shares up $6.56 to $46.31. Both trade on the New York Stock Exchange.

The companies called the deal a “merger of equals.” Shareholders of both banks would swap their stock for shares in a new company, and Bank of Montreal holders would receive shares valued at 22% more than Thursday’s closing price.