No. 2 bank in Canada buys N.J.'s Commerce

October 03, 2007|By New York Times News Service.

OTTAWA -- Commerce Bancorp agreed to accept an $8.5 billion offer from Toronto-Dominion Bank yesterday, three months after the removal of its maverick founder, Vernon W. Hill II, made the sale of the company inevitable.

Hill, a real estate developer, had dominated the New Jersey bank since its founding 34 years ago. But the mingling of bank business with his political interests and the businesses of its directors, officers and family led to his downfall.

While Hill no longer has an executive role at Commerce, he remains a major shareholder. When he was forced out in July, he was eligible for a $10 million severance. With yesterday's deal, he will hold $209.6 million in stock, according a pay analysis by James F. Reda & Associates.

For Toronto-Dominion, Canada's second-largest bank, the deal provides another way to overcome the limited growth opportunities at home.

"With this deal T-D has achieved critical mass in the United States," W. Edmund Clark, Toronto-Dominion's president and chief executive, said during a conference call with investors and analysts. The acquisition will double Toronto-Dominion's business in the United States, adding almost 460 outlets and $48 billion in assets in nine states.

Toronto-Dominion is active in the Eastern United States through its TD Banknorth unit,

As a bonus, the rise of the Canadian dollar to slightly greater than parity with the U.S. dollar will reduce the purchase price.

But analysts said Commerce's history might create greater-than-usual challenges when Toronto-Dominion begins to integrate its new holding.

"The question is: Can they maintain the culture at Commerce, which is charismatic and growth-oriented, while improving earnings?" said Gerard Cassidy, an analyst with RBC Capital markets, which is owned by the Royal Bank of Canada, a rival of Toronto-Dominion.

Bankers said Commerce's operations made it difficult to find prospective buyers. Most big American banks that looked at the bank believed that it had too many overlapping branch locations and that its business model was too difficult to digest. Even Toronto-Dominion will have to overhaul its operations as well as the way it manages its balance sheet, people involved with the deal say.

Commerce focused on retail banking, luring customers with good service and extended hours. That has also been the approach taken by Toronto-Dominion's retail unit, particularly since it acquired Canada Trust in 2000.

To emphasize their customer-oriented approach, both Hill of Commerce and Clark of Toronto-Dominion often referred to their branches as stores.

The difference, Cassidy said, is that Toronto-Dominion, which operates in a much less competitive market, pampers its customers at a much lower cost. The Canadian bank, Cassidy calculates, spends about 50 cents for every dollar it generates. That amount is 74 cents at Commerce.

"That's extremely high; it's unprofitably high," Cassidy said.

Under Toronto-Dominion's offer, Commerce shareholders will get 0.4142 of a share in the Canadian bank as well as $10.50 in cash.

The two banks value the transaction at $42.37 a share, a small premium over yesterday's closing price for Commerce of $39.47, including an adjustment for its 13 percent dividend payments.

The relatively low premium reflects the gradual rise in shares that followed Hill's removal and the speculation that the company would be sold.

The deal reflects only a 13.5 percent premium for the deposits held by Commerce, compared with 23 percent to 40 percent for other recent bank transactions, according to the two companies.

"This is the prize that they are buying, that deposit base, so why is that so low?" asked Brad Smith, an analyst at Blackmont Capital in Toronto. The bank has about 15,000 workers and 2.4 million customers.

While the five Canadian banks that operate nationally and dominate financial services have posted record profits, partly because of Canada's oil and commodity-driven economic growth, they may have reached the limit of what they can do in their home market.

The Canadian government has repeatedly thwarted attempts at domestic mergers.

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