On Friday, investors cheered as Commerce Bancorp (NYSE:CBH) agreed to make changes in its governance practices. The bank was doing business with a company in which Chairman and CEO Vernon Hill was a partner, and it procured architectural services from a firm run by his wife. Hill resigned suddenly last week.
The stock has jumped as some onlookers anticipate a takeover. But although I certainly believe the changes at Commerce are long overdue, I think the celebration might be premature.
After all, who would want to buy a bank that has had regulatory problems? Any prospective buyer would surely want to wait at least until all of Commerce's issues have cleared and it sets new policies.
Stranger things have happened. But based on Friday's closing price of $36.99, Commerce is already trading at a rich P/E ratio of 24. Hill, meanwhile, still owns almost 5 million shares of stock, or about 3% of the company, and he has long opposed a merger. If Hill sells his shares, it could depress the stock, since it might take some time to get rid of his stake. On the other hand, he could decide to hold onto his stock and become a thorn in the new management's side by vocally opposing any deal.
I don't think a buyout is in shareholders' long-term interest. While a buyout might provide a nice, immediate boost to the stock price, a large buyer would destroy the bank by destroying its culture.
For related Foolishness:
Follow the banking industry, or any of thousands of stocks, on Motley Fool CAPS. Add your opinion -- it's free to participate!
Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when not being wrestled by his three children. Feel free to email him at [email protected]. He doesn't have any positions in the companies mentioned. The Fool has a disclosure policy.
