Commerce Bank: An Expensive Strategic Asset

The $8.5 billion acquisition

of Commerce Bancorp by Canada’s Toronto-Dominion Bank is being greeted with

something of a shrug this morning. When Commerce CEO Vernon Hill was ousted

in June, it seemed only a matter of time before the company was sold –

but analysts were expecting the franchise to get something between $45 and $50

per share, rather than the $42.37 at which this offer is valued.

There’s lots of talk

this morning about how greenbacks are cheap for Canadians these days, of course.

But Commerce’s assets are all in US dollars, and they’re clearly worth less

– in US dollars – now than they were before the liquidity crunch

of July and August.

So let it just be noted that TD is paying more than 2.8 times book value for

Commerce Bank, which is a very high multiple for a retail bank heading into

an economic downturn. The multiple comes not from enormous growth prospects:

if anything, Commerce’s home market around New York and New Jersey is overbanked.

Rather, it’s a function of the rapid consolidation of the US banking system.

Mid-sized banks are extremely attractive, these days, to big banks which are

finding it hard to grow organically and therefore feel that they need to grow

by acquisition. In other words, they’re strategic, not financial, assets –

and get priced accordingly.

So the price that TD is paying might not be much of a premium to where Commerce’s

shares have been trading. But those shares have been pricing in a possible acquisition

since June.

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