When former CEO and founder Vernon Hill was ousted over regulatory issues, banking analysts knew that it wouldn't be long before another bank gobbled up Commerce Bancorp (NYSE: CBH). So it wasn't much of a surprise when Commerce said "I do" on Oct. 2 to Toronto-Dominion Bank (NYSE: TD).
The deal
Commerce Bancorp shareholders will receive a combination of 75% TD stock and 25% cash, worth approximately $42 per share. Since Commerce's shares were trading at $34 as recently as August, the bank's shareholders are receiving a decent premium.
Does the deal make sense for TD shareholders? It depends on how well the company can integrate its new purchase. TD's aiming for $310 million worth of cost synergy by 2009 (in comparison with the deal's $8.5 billion total value).
The acquisition price-to-forward earnings multiple, at 22.5, was a bit higher than the 18.1 median multiple of comparable transactions (according to TD's calculations). On the other hand, the 13.5% core deposit premium multiple was much lower than the comparable median multiple of 38.1%. In addition, TD estimates that, including forecasted synergies, it's paying a very reasonable 13.5 times 2008 earnings for Commerce Bancorp.
As a bonus, the strength of the Canadian dollar (also known as the loonie) makes the deal much more attractive for TD. When TD bought a stake in TD AMERITRADE (NYSE: AMTD) in 2005, one loonie only bought $0.80 U.S. dollars. Today, loonies and dollars have equal value, tilting merger economics heavily in favor of Canadian acquirers.
The survey says ...
I'm taking a wait-and-see approach. By buying Commerce, TD scooped up 444 branches with an average of $100 million in deposits per branch, as well as a company adept at growing and gathering deposits. Combined, the two companies will be the seventh-largest bank by number of branches, right between Income Investor pick Washington Mutual (NYSE: WM) and Regions Financial (NYSE: RF).
Clearly, the combined company will have abundant potential. If TD can harness Commerce's branch and deposit growth, wring expenses out of Commerce's cost structure, and put its deposits to work in earning assets yielding high risk-adjusted returns, then the deal could be a home run for shareholders of both banks.
However, bank mergers are notoriously tricky, and Commerce's unique culture adds a higher degree of difficulty. Shareholders should keep a watchful eye on how smoothly TD incorporates Commerce into the fold.
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