Thursday, October 04, 2007

TD Bank to Buy Commerce Bancorp

The Globe and Mail, Tara Perkins & Andrew Willis, 4 October 2007

Toronto-Dominion Bank chief executive officer Ed Clark has a few challenges ahead of him as he attempts to sell his $8.5-billion (U.S.) acquisition of Commerce Bancorp Inc. to the shareholders of both companies.

TD's shares continued to drop yesterday as a number of analysts downgraded the stock, and a U.S. lawyer told The Globe and Mail that he's planning on launching a lawsuit to try to force the two banks to renegotiate the deal.

Maryland-based lawyer Richard Greenfield, who is already involved in a lawsuit involving Commerce Bancorp, says he is representing a group of about a dozen of the New Jersey-based bank's institutional and individual shareholders who say they are going to sue its board for allegedly breaching its fiduciary duty by accepting TD's takeover offer.

"The board of Commerce was really without a leader," Mr. Greenfield said in an interview late yesterday. "And they jumped at this deal to, in part, try to get out of some of the predicament that they are in and that has been left to them by Vernon Hill, the former CEO."

Mr. Greenfield said his clients collectively hold a "substantial" number of shares that is less than 5 per cent of Commerce's total.

"From what we can tell at this juncture, Toronto-Dominion hasn't done anything wrong that we can see," he added. "From their perspective, they want to buy the assets as cheaply as they can. And they've effectively done that. I think they've got an incredibly good deal for them, but not for the shareholders of Commerce."

The lawyer also complained about a side deal that will see Commerce sell its insurance business to George Norcross, who is a director on Commerce's board. Sources said Commerce Bancorp's financial adviser Goldman Sachs screened a number of potential buyers, including U.S. retail giants Citigroup and Bank of America, but TD was the only bank to enter into negotiations. Analysts say it is extremely uncommon for a regional bank to be purchased in a hostile deal, and believe TD's friendly bid for Commerce will prevail.

In a note to clients yesterday, Genuity Capital Markets analyst Mario Mendonca said that he would not rule out another bidder for Commerce, but he believes TD is in a strong position to complete this deal, partly because of the $330-million (U.S.) break fee Commerce would have to pay if the transaction fell through.

Mr. Mendonca was one of the analysts that downgraded TD's stock yesterday. Canadian banks, including TD, have not demonstrated an ability to pull off big U.S. deals, he said. Moreover, the deal comes with specific risks, such as Commerce's exposure to structured mortgage products, he said.

CIBC World Markets analyst Darko Mihelic also downgraded TD's stock yesterday, because he expects this acquisition to mean a repeat of the messy early days when TD was first integrating its current U.S. banking platform, TD Banknorth.

Even now, Banknorth is still a work in progress and there's limited evidence that TD has successfully turned it around, Mr. Mihelic wrote in a note.

He said the Commerce deal presents "significant integration risks as well as the increasing risk of a weak U.S. economy." TD is effectively "doubling down on U.S.-based earnings ahead of significant economic risk in the U.S."

While analysts downgraded TD shares over the short-term risk, many agreed with Mr. Mihelic's notion that it's probably a good acquisition for shareholders over the longer term, at least "in theory."

In a note to Banknorth employees, TD said some overlapping branches will likely be closed as part of the restructuring that will occur when the two banks are integrated.

Meanwhile, TD CEO Ed Clark said in an e-mail to the bank's employees Tuesday that its stock is facing downward pressure which could last months because Commerce shareholders are selling it short, not because the market doesn't like the long-term prospects of the acquisition of Commerce.

On Tuesday morning, Commerce's U.S. shareholders awoke to the news that their bank will be sold to TD for $42 a share. One-quarter of that price will be paid in cash, while the remainder will be paid using TD shares.
The Globe and Mail, Derek DeCloet, 4 October 2007

Who needs domestic bank mergers? Not Ed Clark.

"I've never been, as you know, necessarily a big fan of Canadian mergers as a way of preserving Canadian financial institutions," His Edness opined the other day, as Toronto-Dominion Bank announced its plan to buy, for $8.5-billion, New Jersey's Commerce Bancorp. "I think it would be better for Canadian banks, if you want to be world players, [to] go out in the world, compete head to head, and prove you're better."

Of course he thinks that. Mr. Clark, more than any other Canadian bank executive, has based his entire strategy on the idea that big bank mergers are DOA in Ottawa - "never going to happen," as he told the Business News Network. But guess what? The banks are making it harder to argue mergers ever need tohappen.

It wasn't always that way. This December will mark 10 years - has it really been that long? - since Royal Bank of Canada's John Cleghorn took his famous walk to see Matt Barrett at Bank of Montreal's Christmas party. Their little eggnog chat led to a merger agreement barely a month later, during which Mr. Cleghorn quipped that he wanted to stop "dicking around on the beach" and Mr. Barrett compared his bank to a local hardware store waiting around for Home Depot to put it out of business.

They made their point badly, but still, they had a point. The major banks, save BMO, were nobodies outside of their home markets. Wouldn't mergers fix this insularity? Mr. Barrett and Mr. Cleghorn thought so. Paul Martin, the Finance Minister who had the final say, disagreed, forcefully. That was in 1998.

And since then? Merger policy has been studied, examined, re-examined, pondered and analyzed to death. The banks have been waiting for a clear signal from Ottawa almost as long as Chicago Cubs fans have been waiting to get to the World Series.

But nothing: Neither Liberals nor Conservatives want to be the ones to tell voters that the greedy rotten banks should be allowed to get bigger. Nor do they want to be seen as anti-capitalist control freaks. So the feds haven't said no to bank mergers; they've said maybe, which is much worse.

"Maybe" is an insidious, paralyzing policy. Maybe is what forces Canadian banks to make lots of little, lower-risk acquisitions in foreign countries, rather than cracking open the vault to make a big one. No banker wants to make an expensive deal and take a hit to his stock price, only to find out two months later that he has become takeover meat because Ottawa lifted the freeze.

But maybe that reticence is now ending, starting with Mr. Clark's play for Commerce Bancorp. With it, TD would have more branches than all but six banks in North America. Less triumphantly, RBC's Gord Nixon has spent close to $4-billion in a month on foreign retail banks, and nobody bats an eye. Yet six years ago, when Mr. Nixon was CEO-in-waiting and the bank spent about $3.5-billion to buy a North Carolina bank, it was a huge story.

Why the difference? Then, RBC was barely a $30-billion bank and now it's a $70-billion bank. TD, in the dark days of 2002, shrank to a market capitalization of $17-billion and now it's more than $50-billion. That's what happens when your financial performance is excellent, and that's the real force behind the Canadian banks' sudden confidence.

It's not the loonie; it's the stock price, stupid. Since Dec. 14, 1998 - the day Mr. Martin killed the RBC-BMO and CIBC-TD merger proposals - the TSX banks index is up 182 per cent. The KBW banks index, a measure of two-dozen leading U.S. banks, is up 47 per cent. You could look it up. U.S. bank investors have lost money in three of the past six years, and are losing again this year. Canadian banks haven't lost since '99.

There are many reasons for this. Our economy has been very good; Canadian bank customers are far more loyal; U.S. banking is simply a crummier business. But the Canadian banks have also gained muscle by pushing around, or sometimes mopping up, a lot of smaller competitors at home. Witness the travails of Coventree or DundeeWealth or (less recently) AIC, and you get a picture of what it's like to compete against them.

Now pretend you're the Finance Minister. You know that every single major bank has been earning returns on equity of 20 per cent (or close to it). You know that there are zero votes to be gained by letting them join together. And now you see that Mr. Clark and Mr. Nixon and Scotiabank's Rick Waugh have billions to throw around and are turning their banks into global ones. So who needs bank mergers?
BMO Capital Markets, 3 October 2007

TD Bank announced on October 2 that it has entered into an agreement to acquire Commerce Bank (CBH-N) for US$8.5 billion, comprised 75% of TD stock and 25% cash. The deal is subject to regulatory and CBH shareholder approval and is expected to close in March/April 2008. There is a break fee equal to 3.9% of the total purchase price.

This deal meaningfully advances TD's retail banking strategy in the U.S. The merged entity, comprised of Banknorth and Commerce, will be a top-five player in most markets in which it competes. Assuming no integration or asset problems, the deal seems to marry a sound deposit gatherer (CBH) with a solid commercial loan franchise (BNK). In addition, the intrinsic growth capability of Commerce Bank should allay the need for more large U.S. Banking acquisitions. Retail banking and Wealth management businesses will make up over 80% of TD Bank's earnings and would argue for a premium multiple versus its peers.

Canadian investors will likely have had limited exposure to Commerce Bancorp. It has been a fast-growing, highly successful retail banking franchise in wealthy parts of the U.S. Northeast with an emphasis on convenience banking. CBH has received industry-leading satisfaction scores from JD Power through a unique combination of strong branch locations, extended hours and a highly visible brand.

The specifics of the asset base of Commerce probably require some comment. The bank is significantly under-loaned, as two thirds of the assets are securities. This carries with it both some risks and opportunities. On the risk front, TD Bank will fair value these securities at the time of close. Commerce Bank has agreed to take losses of US$150 million after tax before closing, to reduce some of the interest rate risk in the portfolio. It is likely that TD will take some more losses at time of closing. We believe that the risk here is very manageable. The securities are insured either by the U.S. government, or one of the government agencies, or are AAA rated. None are backed by subprime and they are all marketable. The opportunity is to add on additional loans (at higher spreads). We believe that TD and Banknorth have the skills to do this relatively easily.

The transaction price of US$8.5 billion is comprised of US$10.50 cash and 0.4142 shares of TD Bank. The multiple is 22.5x 2008 forecast earnings, 13.8x including the full impact of the synergies. On a price-to-book basis, the deal is being advertised at 3x tangible book value; however, this multiple will likely rise once the securities portfolio is fair valued at the time of closing the deal. As a result, goodwill on the deal will likely rise somewhat. Management has estimated cost synergies at $310 million, pre-tax and has not included any revenues synergies. TD Bank will lose about 150 basis points of Tier 1 as a result of this deal.

Forecasts and Conclusions

We are raising our target price on TD Bank to $77 from $75, and are leaving our forecasts unchanged. We were intending to raise our 2008 forecasts (to reflect stronger domestic contribution), and with this increase, we offset the $0.10 of expected dilution from the deal. We note that there is some small potential that another bidder emerges for CBH.

From our perspective, however, this deal places TD in a unique position compared to its Canadian peers. First, it has shifted its business heavily to retail from wholesale. We believe that over 80% of TD's earnings will come from retail banking and wealth management (the average is 65%).

Second, the bank will have critical mass in the U.S. TD will have strong market share positions in most states in which it competes. This complements its excellent position in Canada.

Third, the company does not have to do more large deals to continue growing its non-Canadian footprint. Commerce (like CT) has a well-established strategy of growing de novo. This reduces the need to periodic large transformation deals (such as was announced on October 2 and drove the stock down). We reiterate our Outperform rating on TD.

The move in the stock yesterday (October 2) reflected the significant arbitrage activity as U.S. investors prepared for receiving TD shares (and the stellar performance of the stock over the past month). We believe that the market will, upon review, realize that this deal sees TD complete a transformation from a 'wholesale heavy' Canadian only bank to a global bank with strong positions in most business lines.
RBC Capital Markets, 3 October 2007

We have lowered our 2008E cash EPS to $6.00 from $6.10, reflecting dilution from the transaction, and have lowered our 12-month target price by $1 as a result.

We believe that the US$8.5 billion acquisition of Commerce Bancorp deal makes strategic sense for TD, as it expands the bank's footprint to more rapidly growing areas, provides TD with a model that has led to rapid deposit growth and it further increases the mix of earnings that comes from retail businesses. TD has the ability to add value to the Commerce Bancorp franchise via cost synergies, but also via a greater focus on capitalizing on Commerce Bancorp's deposit base through a larger loan book. We believe that the 5% decline in TD's stock price (representing $2.5 billion of market capitalization) on Tuesday was overdone given (1) the potential strategic benefits; (2) the relatively low premium paid versus the prior day's closing price of Commerce Bancorp (6%); (3) potential annual pre-tax cost synergies of $310 million would add $2.0-2.5 billion in value; (4) expected dilution to EPS is less than 2% in 2008 and neutral in 2009.

TD trades at 12.2x NTM EPS(E), which makes the stock attractive in our view as we believe TD offers better balance of growth and risk than its peers. Domestic retail momentum and higher earnings from the U.S. (driven by cost synergies at TD Ameritrade, and by higher ownership of TD Banknorth and the Commerce Bancorp acquisition) should drive above-average retail earnings growth for TD. We also believe that there is less downside risk to our earnings forecasts for TD than for the industry as the bank is less exposed to wholesale earnings, and appears to have a more conservative mix of businesses within its wholesale division.
Scotia Capital, 3 October 2007

TD Opportunistic Acquisition - Modest Premium of 6%

• TD Bank announced on October 2, 2007 that it intends to acquire Commerce Bancorp for US$8.5 billion or US$42 per share, a modest 6% premium to Monday's closing share price. The transaction will be 75% stock and 25% cash at a fixed exchange ratio of 0.4142 TD shares and US$10.50 per share. The transaction includes a break fee of US$330 million or 3.9%.

• The transaction is expected to close in March or April 2008.

• The market reacted negatively to the transaction with TD's share price declining $3.79 per share or 5.0% reducing the bank's market capitalization by $2.7 billion or 32% of the acquisition value which we believe is excessive. TD shares have been reaching new highs in the previous week, which likely contributed to the weakness.

• TD is expected to issue 85.3 million shares representing a 12% increase in shares outstanding.

Purchase Price

• According to TD management, the transaction price represents 22.5x 2008 earnings, 2.96x tangible book value, and a 13.5% core deposit premium. TD anticipates US$310 million pretax in synergies representing a post-synergy multiple of 13.8x 2008 earnings.

• The purchase price of this transaction generally compares favourably to the median of transactions greater than $6 billion since 2004 on a NTM P/E basis including synergies and a tangible book value basis. The acquisition appears to be very inexpensive on a core deposit premium basis with TD paying a 13.5% premium versus median of 38.1%. The transaction appears to be in line with other transactions based on other metrics.

Mildly Dilutive in Year 1, Neutral in Year 2 - Restructuring Charge

• In conjunction with the transaction, TD will take a restructuring charge of approximately US$490 million pre-tax. TD expects the acquisition to be ten cents, or 1.6%, dilutive on an adjusted earnings basis in 2008 and neutral in 2009. TD is projecting C$1.2 billion in earnings in 2009 for its U.S. P&C Banking segment or 25% of estimated TD Bank earnings.

• Tier 1 ratio is expected to decline to within the 8.75% to 9.0% range from 10.2% with tangible common equity to risk-weighted assets estimated at 7.5% to 7.75% at closing.

• Commerce Bank intends to sell a portion of its fixed-rate investment securities and reinvest in floating rate securities in order to limit the bank's exposure to changes in interest rates. As a result, CBH anticipates an after-tax charge of US$150 million in the third quarter. In addition, CBH will sell Commerce Banc Insurance Services Inc., to founder George Norcross.

Acquisition Creates Critical Mass in U.S.

• The acquisition will give TD critical mass in the U.S. with a combined footprint of over 1,000 branches. Commerce Bank has 460 branches and 700 ATMs in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, DC, Virginia, Maryland and Florida.

• TD has improved market position in five of the ten largest and wealthiest markets in the U.S. including New York City, Miami, Philadelphia, Washington and Boston.

• CBH is deposit rich with US$100 million deposits per branch, US$48 billion in assets, US$44 billion in deposits and US$16 billion in loans.

Strong Cultural Fit

• CBH is primarily a retail bank offering personal and commercial banking, insurance, investment planning and wealth management. CBH is focused on organic growth and has customer satisfaction as its top priority.

• Commerce Bancorp is considered one of the most customer friendly banks in the U.S.


• Our 2007 and 2008 earnings estimates remain unchanged at $5.80 per share and $6.30 per share, respectively, as we expect estimated 2008 earnings dilution from the transaction to be offset by improving operating performance.

• Maintain 1-Sector Outperform based on TD's superior profitability, especially return on risk weighted assets, and favourable business mix with wholesale earnings expected to decline from the current 22% of earnings to 15% earnings assisted by this acquisition.
Financial Post, Duncan Mavin, 3 October 2007

Toronto-Dominion Bank’s U.S. mega-deal has certainly woken up the sometimes staid Canadian banking sector. But the transaction, which transforms TD Banknorth — TD’s struggling U.S. retail banking operation — might not do much for the bank in the short term, say analysts.

“While TD Bank's shares have recently earned a reprieve from the ‘Banknorth penalty box’ for a variety of reasons, this transaction will put them back in there as investors take a ‘wait and see’ approach,” says Credit Suisse analyst Jim Bantis.

For now, the transaction disrupts Banknorth’s focus on organic growth and increases TD’s exposure to the weakening U.S. economy, says Mr.Bantis.

National Bank analyst Rob Sedran adds that, “Near-term financial implications are negative,” because TD’s balance sheet is already stretched to accommodate the privatization of Banknorth earlier this year.

Despite the short term concerns, both Mr. Bantis and Mr. Sedran say the deal will look better in the longer term. The US$8.5-billion deal for Commerce Bancorp Inc will be perceived as the right decision in five years, says Mr.Bantis.

“At this point of the TD Banknorth strategy, missing out on the eventual consolidation of the mid-Atlantic region would not have been an option for TD management,” he says.

For now, the Credit Suisse analyst downgraded his rating on TD’s stock from outperform to neutral. Mr.Sedran maintains an outperform rating on TD.
Financial Times, 3 October 2007

Generating a wow factor, handing out dog biscuits to customers’ pets, penny arcades. These are some of Commerce Bancorp’s gimmicks for keeping its “fans” happy. But it was the bank’s investors who had the most fun on Tuesday: Toronto-Dominion Bank’s $8.5bn offer for their company works out at a 22.5 times forecast earnings.

This is a risky move for TD. It is earnings dilutive to start, which, though an imperfect measure of the economics, is widely noted by investors. It is also an exciting move. First, there is a good cultural fit. This is key because Commerce’s impressive track record in deposit-gathering relies on a particular culture that could easily be broken by a knife-wielding, cost-cutting takeover.

But TD cannot just rely on deposit growth to make the deal stack up. Its initial return on capital will be an underwhelming 7 per cent. To hit the more impressive internal rate of return of 15 per cent later on, TD surely has to improve on Commerce’s net interest margins. There are several ways of doing this, and the most obvious way is to be more aggressive with Commerce’s deposits. Currently, Commerce has an unusually low ratio of loans-to-deposits. It invests some of the deposits in securities, which in the current yield environment is hard going. In fact, it will lead to a large charge in Commerce’s third quarter, as disclosed on Tuesday amid the news of the takeover. If TD puts more of Commerce’s deposits to work as loans, and comes up with more products that customers pay fees for, it should be able to boost margins.

TD should also, of course, be able to cut costs, though the branch culture will probably be left alone. Still, that leaves a lot of non-branch costs to be trimmed. There are not many banks, for instance, that boast a 65,000 sq ft university to train staff.
The Globe and Mail, Fabrice Taylor, 3 October 2007

Where would Ed Clark be without his loyal retail base? Probably not making splashy acquisitions in New Jersey.

The Commerce Bancorp deal looks like a good one, but it's a lot easier to pull off with the kind of multiple Mr. Clark, TD's CEO, enjoys. Before yesterday's news, according to Thomson Financial, TD had the highest price-to-earnings ratio of all the big five banks, even RBC. A high Canadian dollar is nice, but when three-quarters of the deal is paid in stock, a high valuation is nicer. Does the bank deserve its multiple? Investors certainly think so, and the numbers are compelling.

TD derives a high proportion of its earnings from retail banking - more than half of earnings comes from the Canadian personal and commercial segment. That's higher than most other banks. And TD is more profitable. An institutional investor in the Vox Witness Protection Program says TD's branches earn about $2.2-million each. RBC is higher at $2.6-million, but the rest of the pack lags at about $1.5-million.

How does TD achieve this? Partly from applying the Canada Trust retail model to the branch network, including longer hours and more staff who can sell products.

It appears that Canadian consumers pay up for convenience because TD also has a low-cost deposit base, meaning it gets away with paying less than other banks for the money it borrows from you and I when we leave cash in the bank.

Mr. Clark, of course, ran Canada Trust when it was bought by TD, and he's now turning TD into a bigger version of his former employer. There's room for plenty of organic growth. For example, the bank is slowly turning most of its branches into the more retail-friendly models. That, with a healthy investment in technology matched only by RBC, means more selling. It also means TD can add more wealth management.

Compared to RBC (our institutional investor figures there's two camps of bank in this country: TD and RBC in one, the rest in another), TD has room to grow its wealth management offering by putting more brokers and financial planning types in branches. RBC has pretty much tapped out its opportunities. Higher organic growth potential means a higher multiple. In this case, the case for growth looks pretty solid. Investors clearly think the profitability gap between the two top banks is closing.

Focusing on boring retail has spared TD some of the expensive blunders of its peers. The bank made a decision to exit or not enter the kinds of businesses that are causing other lenders so much trouble these days. It has no subprime CDO exposure, no liquidity lines to suspect issuers, no investments in toxic asset-backed commercial paper.

That explains why the stock recovered so much from the lows it hit in August, shooting from $66 to $76 in about six weeks, outperforming all of its rivals except CIBC.

So the timing of this acquisition couldn't have been better. TD gets to use a strong currency - or currencies, dollars and its stock - to buy what many analysts describe as the Canada Trust of the U.S., with $43 billion in low-cost deposits that are growing at a double digit clip, along with branches - or stores, as Commerce Bancorp calls them. To put that number in perspective, TD has about $150-billion in personal deposits, so it's a big leap.

Investors aren't as nervous about this deal as the sharp drop in TD's stock price suggests. A lot of that drop is arbitragers selling TD short and buying Commerce shares to earn a fairly safe spread.

But there's no doubt that some doubters will worry about earnings dilution in the short term. They shouldn't necessarily. It's really not hard to make earnings accretive deals that nonetheless dilute your return on capital. Most big acquisitions worth making will trim earnings for a while.

If this one works out like Canada Trust did, that dilution will soon be forgotten and Mr. Clark's halo will be even brighter. And all because he banked on the little guy.
The Globe and Mail, Andrew Willis, 3 October 2007

Canadian bankers wait their whole careers for this kind of market.

For Ed Clark and Gord Nixon, heads of Toronto-Dominion Bank and Royal Bank of Canada, respectively, the past few years have been a period of restraint. At a time when U.S. regional banks boasted sky-high valuations, and plenty of deals played out, both chief executive officers focused on fixing up their U.S. branch networks and setting aside capital.

In August, the world changed. U.S. regional bank stocks nosedived on well-founded concerns about the banks' exposures to subprime mortgages. Credit became scarce and private equity funds, long the deep-pocketed winners of corporate auctions, pulled in their horns. And as the loonie soared, so did the valuation on Canadian banks, which enhanced the Canadian CEOs' ability to pay for takeovers with their own shares.

The bankers responded with panache yesterday: TD Bank launched a bold $8.5-billion (U.S.) bid for Commerce Bancorp Inc. while RBC landed a dominant position in Caribbean banking.

RBC made its move with the $2.2-billion purchase of RBTT Financial Holdings Ltd., just weeks after dropping $1.6-billion on an Alabama bank. John Aitken, an analyst at Dundee Securities, said: "We would not be surprised to see other Canadian financial institutions make large acquisitions in the United States in the near future."

For banks and insurers with U.S. expansion strategies, this is the time to move. Canadian banks "sit in a relatively strong position" versus their U.S. peers, Kenneth Usdin at Bank of America said in a note yesterday titled "The Canadians are Coming."

"Canadian banks have seen strong appreciation of their stocks over the past few years, significantly outperforming most U.S. peers," Mr. Usdin wrote. "Valuations have improved and market caps have grown, improving relative comparisons on both metrics. Further, the Canadian dollar has appreciated versus the U.S. dollar."

In addition to strong balance sheers, Canadian financial service CEOs are largely confident, based on past deals, that they can meet the challenges that come with integrating operations. Mr. Clark, for example, keeps and consults binders full of notes on the IT and personnel lessons learned from combining TD Bank with Canada Trust.

"The Canadian banks, and their boards, know that they can execute the basic, but profitable, blocking and tackling that's needed to run retail banks. Where they are less confident, understandably, is in the riskier businesses, such as U.S. wholesale [investment] banking," said one corporate financier who has worked on acquisitions with a number of banks.

Who will move next? All three major life insurers have shown the ability and desire to do foreign acquisitions, as have two other big banks: Bank of Nova Scotia and Bank of Montreal. The only wallflowers are Canadian Imperial Bank of Commerce and National Bank of Canada; neither has an existing American retail platform.

Analysts have already made their forecasts on who might marry up next; here is a selection of their predictions:

BMO is said to be looking at a $3.5-billion-plus acquisition of Minnesota-based TCF Financial, which has 446 branches and 5,600 employees..

Manulife Financial Corp. has been seen by analysts as interested in three firms: Principal Financial Group, based in Iowa; Nationwide Financial Services of Ohio and British insurer Prudential PLC.

Sun Life Financial Inc. paid $650-million for a U.S. benefits company last year and is expected to keep doing similar-sized transactions.

Power Financial Corp. is seen as on the prowl, even though its Great-West Lifeco Inc. subsidiary is digesting last year's $4.6-billion acquisition of Putnam Investment Trust, the 10th-largest U.S. mutual fund company.
Financial Post, Peter Morton, 3 October 2007

Founded by a man who once owned 40 Burger King restaurants, Commerce Bancorp is certainly one of the most unusual banking chains in the complex U.S. financial-institutional environment.

It calls itself "America's most convenient bank" and its 460-plus branches and 700 ATMs through New Jersey, New York, Connecticut, Pennsylvania, Virginia and Maryland, and even as far as Florida, are modelled more after a perky fast-food restaurant than a dour bank.

The outlets are trimmed in red, it has a seven-day lobby or drive-through operations, free coin-counting (even for non-customers) as well as free lollipops and dog biscuits in its branch lobbies.

Last year, it gave away 28 million pens as well as innumerable coffee mugs. It was also one of the pioneers of U.S. banking for fee-free personal chequing accounts as well as instant ATM cards, online banking and stock trades.

Better yet, it has used popular television talk-show hosts Kelly Ripa and Regis Philbin in its "have it your way" commercials that emphasize its customer-friendly approach .

A rarity in the banking business, Commerce, sold yesterday to Toronto-based Toronto-Dominion Bank, was created from scratch in 1973 in Cherry Hill, N.J., by Vernon Hill, who was also a real-estate developer. Since then, its annual revenues have ballooned to US$1.6-billion and it now has a market capitalization of US$7.6-billion, which ranks it third among 146 regional U.S. banks.

It also has 2.4 million customers, assets of US$48-billion and deposits of US$44-billion. Commerce also has about 15,000 employees.

The unique hands-on approach of Mr. Hill has certainly played a role in the bank's operations -- and in some of its woes. He ran into trouble with regulators when he tried to run the bank a little too much like his real-estate and fast-food outfits.

The U.S. Office of the Comptroller of the Currency and the Federal Reserve Bank of Philadelphia launched a probe several years ago into some of the services Commerce used, including a company created by Mr. Hill to look for new branch locations and another owned by his wife that decorated new branches.

In the end, Mr. Hill resigned this summer from an active role in the bank and Commerce itself pledged to end deals with company insiders. He still owns about 2.6 million of the 193 million shares outstanding. Analysts speculated the legal woes and ultimate departure of Mr. Hill in June meant the company would soon be up for sale.

Yesterday, some analysts wondered how Mr. Hill's departure would affect the bank and its new owners.

"The culture of the Commerce bank branches is going to be difficult to maintain, if not impossible to maintain," said RBC Capital Markets New York analyst Gerard Cassidy. "He was the life and the blood of that organization. When he left, it was taking the heart out."

Ed Clark, chief executive of TD Bank, insisted yesterday the changes would not "impact growth" of the bank. But one thing that may change soon is Commerce Bancorp's sometimes all-too-friendly approach to retail banking.

The police in New York and New Jersey have warned Commerce its outlets are less than robbery-resistant and have been hit many times in the New York and New Jersey area because they keep late hours and do not have bulletproof glass at tellers' windows.
Financial Post, Sean Silcoff, 3 October 2007

Canadian banks firms are not known for their daring, ingenuity or cunning. Mostly, they make a lot of money in the protected Canadian retail market and keep investors happy. Their growth outside Canada has, for the most part, been low-key and timid.

Until yesterday, that is, when Toronto-Dominion Bank kicked into high gear CEO Ed Clark's plan to become a major force in U.S. retail banking. TD said it will pay US$8.5-billion in cash and stock for the 444-branch Commerce Bancorp Inc., after dropping US$8.4-billion since 2005 on its other U.S. retail bank, TD Banknorth.

TD's purchase of CommBanc suggests our closeted banks are ready for a real battle. TD has bravely chosen 'Go Big' over 'Go Home.' Or, just maybe, it has no idea what it's getting itself into.

TD's track record in U.S. retail banking is not great. The strategy at Portland, Me.-based TD Banknorth has shifted constantly in the nearly three years since TD said it would buy control of the firm. After initially saying it would stick by the management team, Mr. Clark instead parachuted in his own man, Bharat Masrani, as CEO last year. TD had planned to use Banknorth as a vehicle to buy banks with US$15-billion in assets, but its two deals before yesterday were a fraction of that size. Banknorth, which had a good reputation for integrating deals, struggled with its two purchases. Profits are down, and early this year, the U.S. bank said it wouldn't buy anything until 2008, as it focused on costs and service.

If TD's herky-jerky U.S. strategy has been hard for investors to follow, just wait for the Commerce Bancorp experience.

CommBanc is an exotic animal in the world of banking. Founder Vernon W. Hill II's story is classic all-American entrepreneur. In 1973, the owner of 40 Burger King outlets decided he could apply fast-food customer service to banking. His well-appointed branches -- he called them 'stores' -- stayed open at night and on weekends. He installed coin-counting machines so kids could change their pennies for bills, and gave out lollipops. Dogs were welcome and even got biscuits. "Banking should be fun," Mr. Hill once said. It was so for employees, who were treated to team-building sessions that would make Wal-Mart blush, let alone other banks. CommBanc held pep rallies at Radio City Music Hall -- with Rockettes in the house --and gave away sports cars to top-performing managers.

CommBanc's ATM machines were fee-free and customers were even reimbursed when they were dinged elsewhere. In an era of industry rationalization, CommBanc's high-touch approach helped it steal other banks' customers and grow fast. Its motto was "America's most convenient bank" and Fast Company heralded Mr. Hill as one of the "most original minds in business," a phrase that has never appeared alongside the name of a Canadian bank CEO.

CommBanc barrelled into the New York City market, where it quickly became a fixture. "They've got more guts than I have" to go to New York, Mr. Clark told the Post. "They were completely fearless."

Does that sound like a fit with TD, where the definition of bold thinking is giving iPods to new customers instead of toasters? "We know we can absorb this culture," Mr. Clark said.

That's hopeful, or naive. CommBanc is a high-speed train of a firm, only now it is without its conductor. Mr. Hill was forced by U.S. regulators to quit as chairman and CEO last summer after CommBanc funnelled US$50-million worth of business to his wife's firm (she designed the branches), and gave contracts to his brother and son. Two executives were recently convicted of conspiracy for giving loans to Philadelphia's city treasurer in exchange for its financial business.

Leave aside the unseemly details and you're left with one nagging concern: The larger-than-life entrepreneur that built the bank is gone, along with the verve he poured into stealing the business and loyalty of customers from other banks. It would be hard to replace a rare visionary in such a grey-faced industry with anyone other than an outsider, and banks are not exactly beacons for outsiders. More likely, TD will install a veteran bank executive who will focus on improving CommBanc's relatively low profits (which resulted from its high-touch service) while missing the point of how it got to where it is. Will customers continue to love CommBanc? Early signs are not good. Second-quarter profits -- after the CEO left -- were down 5%. An analyst report in August said the quality of customer service had fallen sharply.

Mr. Clark seized a rare opportunity to buy a large U.S. bank, when the loonie is strong and the U.S. economy is weak. Maybe he can break out of Canada and show TD belongs on the world stage. Or maybe he's buying himself a big problem.
Financial Post, Grant Surridge And Duncan Mavin, 3 October 2007

Only a few months ago, Ed Clark, chief executive of Toronto- Dominion Bank, said he would face a "real dilemma" if tough conditions in the U.S. banking sector presented the opportunity for an acquisition before he was done tidying up the bank's existing Banknorth franchise in the country.

But circumstance changed, and the chance to buy New Jersey-based Commerce Bancorp Inc. could not be passed up when a convergence of factors, including a surging loonie, an executive scandal and low financial-services sector valuations, made the deal possible.

Yesterday, TD agreed to a 75%-stock and 25%-cash deal worth US$8.5-billion to buy Commerce.

"If you are not willing to buy the most convenient bank in the marketplace at a time when you can finally afford it, you should say, 'Go home,' " Mr. Clark said yesterday. "You don't really want to be a great North American player."

The combination of Commerce with TD Banknorth would give TD a "critical mass" south of the border, he said, doubling its retail-banking business and giving it 2,100 branches and total deposits, including those in Canada, of about US$250-billion.

TD says the deal would make it the seventh-largest bank in North America, measured by number of branches. It would also have the largest branch network on the continent among Canadian banks.

The recent surge in the Canadian dollar made the deal attractive, said Mr. Clark, as did the departure of Commerce's chairman and chief executive at the end of June after an investigation by U.S. regulators into business dealings he had with his family.

The U.S. bank's board demanded Vernon Hill II, who founded the company, resign as part of a deal with the Office of the Comptroller of the Currency and the Federal Reserve Bank in Philadelphia.

"I've always watched [Commerce], but it never occurred to me it would come for sale because of the entrepreneur power driver who was never going to sell the company," Mr. Clark said.

In a conference call yesterday, TD executives reiterated that Commerce does not have any exposure to the U.S. sub-prime-mortgage market.

Commerce is a fast-growing retail bank that has shaken up some markets by offering better service, such as extended hours. The model is similar to TD's domestic retail bank, widely considered to have the highest level of retail customer service among the big Canadian banks.

Commerce has about 460 locations in the northeastern United States and southern Florida, with US$48-billion in assets and more than 15,000 employees.

In March, 2005, TD made its first foray into U.S. retail banking by completing a US$3.8-billion deal to purchase a 51% stake in Maine-based Banknorth Group Inc.

TD said management teams at both Banknorth and Commerce would remain in place.

"We view this transaction quite positively, given the significant scale in terms of both branches and deposit base," wrote Dundee Securities Corp. analyst John Aiken in a note. He has a "market neutral" rating on the stock.

TD took advantage of the strong Canadian dollar and the discounted valuations of U.S. financial stocks, wrote Mr. Aiken, adding he would not be surprised to see other Canadian financial companies soon make large acquisitions in the United States.

Commerce shareholders will receive about 0.4 of one TD common share and US$10.50 in cash for each common share of Commerce. Based on the Oct. 1 closing price of TD stock, the deal values Commerce at US$42 per share, or about 6% higher than its Monday closing price of US$39.74.

Despite the relatively slim premium, many investors didn't like the offfer, driving TD's shares down $3.79, or almost 5%, to close at $72.54.

The deal is scheduled to close next spring subject to regulatory approval, assuming another U.S. bank does not come in and make a topping offer.

Mr. Clark said he is confident the same service standards can be implemented at Banknorth and Commerce, and said he has long admired Commerce's strategy of organic growth.

"They've got more guts than I have, they have gone into Manhattan in the last four or five years and took Manhattan and they were completely fearless."
The Wall Street Journal, Robin Sidel, 3 October 2007

Yesterday, Toronto-Dominion Bank snapped up Commerce Bancorp Inc., a regional mid-Atlantic bank that has in the past decade helped revive the banking industry's passion for branch banking. Commerce's founder, Vernon Hill, was ousted from its leadership in June after a series of governance scandals.

The $8.5 billion cash-and-stock deal represents the latest in a recent string of Canadian-led banking deals. Also yesterday, Royal Bank of Canada agreed to acquire Caribbean-based RBTT Financial Group for $2.2 billion. That deal came on the heels of RBC's move last month to buy Alabama National Bancorp for $1.6 billion, representing its biggest-ever U.S. transaction.

The Canadian dollar has surged against the U.S. dollar in recent weeks, spurred by high commodity prices and a strong Canadian economy. The two currencies last month reached parity for the first time since 1976. Late yesterday in New York, one dollar bought 99.76 Canadian cents. In comparison, five years ago, one dollar bought 1.5868 Canadian dollars.

As a result, Canadian companies, which have spent the past couple of years shedding debt and cleaning up their balance sheets, are poised to spend their loonies, named after the Canadian fowl emblazoned on the currency.

"The Canadian corporate sector is in good shape, and now they have the currency to make some acquisitions," says David Wolf, chief Canadian strategist for Merrill Lynch & Co.

Among industries, Canadian financial institutions are expected to be particularly aggressive, because many U.S. banks have been battered by the summer's rout in credit markets and fallout from the subprime-mortgage mess. Further, these banks largely expect loan delinquencies and charge-offs to rise in coming months from historic low levels. Those factors could lead to declining stock-market values for U.S. regional banks. At the same time, large U.S. banks that might be typical buyers are also dealing with the same problems and may be hesitant to pursue a big deal.

"The strong Canadian dollar and weakening U.S. credit environment give the Canadian-based banks a unique opportunity to extend any strategies that they have in place," says Brad Smith, senior financial-services analyst at Blackmont Capital Inc., a unit of CI Financial Income Fund, a Toronto-based wealth-management company.

Indeed, the strong currency played a role in Toronto-Dominion's decision to grab the Cherry Hill, N.J., bank. Commerce, which has nearly 460 branches in 10 mid-Atlantic states, is well regarded for its deposit-gathering and strong customer-service culture, which treats branches as "stores." The bank's branches typically are open long hours -- including Sunday -- and are known for low fees and free services such as automatic coin-counting machines.

Toronto-Dominion already has a U.S. banking foothold with TD Banknorth, which is based in Portland, Maine, and has nearly 600 branches in eight states in the Northeast. Toronto-Dominion also bought in 2005 a 39% stake in discount brokerage firm Ameritrade Holding Corp., now TD Ameritrade Holding Corp.

Commerce had widely been considered a likely takeover target since June, when Mr. Hill was forced out of the company after a string of governance missteps, including paying his wife's interior-decorating firm to perform work on the bank's branches. With Commerce's unique corporate culture making it difficult to integrate with a large U.S. bank, most industry analysts had speculated that a foreign bank would be the likely buyer.

Ed Clark, president and chief executive of Toronto-Dominion, says he had long coveted Commerce and jumped at the chance to buy the company following Mr. Hill's departure. The rise of the Canadian dollar, he says, helped make the deal more appealing.

"We would have done it if the dollar hadn't moved up, but we got real lucky, because it changed the economics of the transaction dramatically," he said, noting that a weaker Canadian dollar would have made the deal dilutive to Toronto-Dominion's shareholders.

A weaker Canadian dollar didn't stop Toronto-Dominion from acquiring Banknorth in 2004, though Mr. Clark can't forget the weak U.S.-Canadian exchange rate at that time -- "77 cents," he said with a laugh yesterday.

Although the Canadian dollar's strength may have been a positive for Toronto-Dominion, some Commerce shareholders had been hoping for a richer price. At the time of Mr. Hill's ouster, some analysts had estimated the stock could be worth some $44 a share, even as the bank was still dealing with assorted regulatory issues tied to real-estate and vendor transactions. The implied value of yesterday's deal was about $42 a share.

"We suspect the reason that the deal price was a bit lower than we predicted was because Commerce was negotiating from a position of weakness, and many of the logical buyers were not in a position to consider this acquisition," wrote Mark Fitzgibbon, an analyst at Sandler O'Neill Partners, in a research report.

Commerce shares fell 14 cents to $39.47 in 4 p.m. New York Stock Exchange composite trading.
The Globe and Mail, John Partridge, 3 October 2007

Toronto-Dominion Bank chief executive Ed Clark is orchestrating one of the biggest foreign takeovers in Bay Street history, an $8.5-billion (U.S.) deal for New Jersey-based Commerce Bancorp Inc. that will propel TD up the ranks to become the seventh-largest bank in North America.

If TD pulls it off as expected by next spring, roughly half of its 2,100 branches will be in the United States.

“We are the first North American bank,” Mr. Clark declared, taking a not too subtle jab at rivals, such as Royal Bank of Canada and Bank of Montreal.

Commerce Bancorp has nearly 460 locations throughout New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, D.C., Virginia, Maryland and Southeast Florida. Its footprint covers five of the largest and wealthiest urban markets in the U.S., and the population in the areas it serves is bigger than that of Canada.

Mr. Clark said TD's been worried for some time about how to keep up the 15-per-cent annual pace of growth in its Canadian consumer banking operations. “It has to, by definition, slow down,” he said in an interview.

“Clearly, the United States offers way higher growth.”

Canada's mature banking market means all of Canada's big banks will be increasingly turning their attention south, according to Brenda Lum, a banking analyst at Toronto-based DBRS Ltd.

“I think that Canada provides a core, stable base of earnings and revenue,” Ms. Lum said.

The challenge domestically is that, with a handful of dominant banks, market share gains often come at the expense of revenue, because one of the few ways to make any sizable gains is by dropping prices.

“So, I think longer term, if you want to grow meaningfully, then to be a medium-sized fish in a bigger pond will make it easier,” Ms. Lum said.

TD has already hunted down at least 100 new sites where it can open branches in Commerce's neighbourhoods in coming years. With an average of more than $100-million in deposits in each of its branches, Commerce beats the industry average of between $50-million and $70-million, Mr. Clark said.

Just a few short months ago, the prospect of missing out on a big purchase was haunting him. That's because TD is still fixing up its existing U.S. bank, TD Banknorth, for which it paid a total of about $9.1-billion (Canadian) in separate transactions. Mr. Clark wanted to give it time to “get its game plan down” and grow on its own.

“My nightmare scenario is that something comes along that's strategic that I really can't miss, and it comes out at a price that I'm prepared to pay,” he told analysts in August. But when that scenario played out, for Mr. Clark, it became a dream come true.

He'd had his eye on Commerce for years, and the stars aligned for him recently. First Commerce put itself up for sale after replacing its former CEO, who is being investigated for deals he did with companies controlled by his relatives. Then the loonie hit par with the U.S. dollar in the middle of negotiations. And TD's stock was strong thanks to its lack of exposure to U.S. subprime mortgages and related areas, Mr. Clark said. The acquisition had become very affordable.

“Sometimes you just don't get to choose your timing,” he said.

He said he's found a “low-risk way” to continue his U.S. expansion. But the size of his gamble on a bank that's had trouble with regulators and an allegedly self-dealing executive carries risks. TD could also find it hard to find cash to spare for other opportunities that might arise in the near future, such as expanding its U.S. discount brokerage operations. TD owns about 40 per cent of TD Ameritrade Holding Corp.

The takeover of Commerce is worth more than 15 per cent of TD's market value, BMO Nesbitt Burns Inc. analyst Steve Theriault noted. Three-quarters of the deal will be paid for with stock, meaning TD will also find itself with a growing U.S. shareholder base.

He said the key challenge is “de-risking” Commerce's balance sheet. Its $28-billion (U.S.) securities portfolio stood at nearly 60 per cent of its total assets at the end of June, which is well above TD's comfort level, he said.

Commerce has agreed to clean up its balance sheet, with the goal of reducing its exposure to changes in interest rates, TD said. Those actions will result in an after-tax charge of about $150-million in the third quarter.

TD Banknorth CEO Bharat Masrani will be running the show as TD puts in place a 12- to 18-month integration strategy. Initially, the two banks will run separately, with Commerce's management reporting to him. Mr. Clark has no doubts that TD knows how to run a large American bank.

“We know that if you look at our statistics on customer attrition, or cross-sell ratios, or customer service, we're better than Bank of America, we're better than Wells Fargo, we're better than any of these big American banks,” he said.

He says he's never been a big fan of using Canadian mergers as the best avenue for growth.

“I think it would be better for Canadian banks, if you want to be world players, [to] go out in the world, compete head to head, and prove you're better.”
Bloomberg, David Scanlan and Bradley Keoun, 2 October 2007

Toronto-Dominion Bank, in the biggest foreign takeover by a Canadian lender, agreed to pay $8.5 billion for Commerce Bancorp Inc., the New Jersey company that ousted founder Vernon Hill three months ago.

Shareholders of Commerce, the state's largest bank, will get about $42.37 a share in cash and stock, or 6.6 percent more than yesterday's closing price, Toronto-Dominion said in a statement today. Toronto-Dominion shares fell the most in five years after the bank said the purchase will reduce profit in 2008 and 2009.

The 62 percent surge in the Canadian dollar since 2002 has increased Toronto-Dominion's market value to more than $52 billion, making foreign acquisitions cheaper for Canada's third- biggest bank. Commerce decided to sell after replacing Hill, the former chief executive officer, whose dealings with companies controlled by family members prompted a U.S. investigation.

Toronto-Dominion "is striking while the iron is hot, with the Canadian dollar at parity,'' said Gavin Graham, who helps oversee about $5.3 billion as chief investment officer at Guardian Group of Funds in Toronto. ``It may be dilutive to earnings in the short term. But TD is making itself into a powerhouse in the northeastern United States.''

The Toronto-based bank already owns Portland, Maine-based TD Banknorth, and Hudson United Bancorp in Mahwah, New Jersey. With the purchase of Commerce, based in Cherry Hill, Toronto- Dominion will double its U.S. business, adding almost 460 outlets and $48 billion in assets across nine states.

Toronto-Dominion's acquisition would be the third-largest foreign transaction for a Canadian company, trailing Manulife Financial Corp.'s purchase of John Hancock Financial Services in 2003 and the takeover of Reuters Group Plc by Thomson Corp. this year, according to data compiled by Bloomberg.

Canadian banks have announced or completed about $18 billion in acquisitions this year of banks in the U.S., Latin America and the Caribbean, taking advantage of the soaring dollar. The Canadian dollar reached equal value with the U.S. currency last month for the first time since 1976.

Royal Bank of Canada, the country's biggest bank, agreed today to buy RBTT Financial Holdings Ltd. in Trinidad and Tobago for $2.2 billion. Bank of Nova Scotia, the second-biggest bank, agreed in August to buy a lender in Chile for about $1 billion.

Toronto-Dominion declined $4.29, or 5.6 percent, to $72.65 in New York Stock Exchange trading, the biggest decline since July 19, 2002. Commerce fell 14 cents to $39.47.

The Commerce purchase will be made with 75 percent stock and 25 percent cash. The Canadian company offered 0.4142 share and $10.50 in cash for each Commerce share. That's $42.37 a share based on Toronto-Dominion's closing share price yesterday. The offer has a breakup fee of 3.9 percent, payable to Toronto- Dominion, if it isn't completed.

The purchase adds to Banknorth's 600 branches and $40 billion in assets in New England and other northeastern states, making Toronto-Dominion the seventh-largest bank in North America by number of branches.

The offer equals about 2.8 times book value for Commerce, compared with the median price of 2.5 times book value for U.S. transactions of more than $6 billion since 2004, the bank said.

``A great franchise became available unexpectedly'' at the same time that the Canadian dollar was rising, said Toronto- Dominion Chief Executive Officer Edmund Clark. ``We have achieved critical mass in the United States.''

Commerce has branches in the New York and Philadelphia metropolitan areas, including about 25 in Manhattan, and around Washington and in Florida. The bank has about 15,000 employees and 2.4 million customers.

Hill, a former real estate developer who founded the bank in 1973, increased assets by more than 16-fold from 1995 through June. The red-trimmed branches were built to look alike, part of a branding idea that Hill said he got partly from his ownership of more than 40 Burger King restaurants.

Commerce said it would replace Hill in June when it agreed to settle a probe by the federal Office of the Comptroller of the Currency and the Federal Reserve Bank of Philadelphia.

The agencies were scrutinizing properties and business services provided by companies that Hill's family controlled. A company started by Hill was asked to search out potential branch locations for the bank, and a company owned by his wife decorated the branches. As part of the settlement with regulators, Commerce promised to end those arrangements and forbid new deals involving company insiders.

Toronto-Dominion's Clark told investors on the conference call that he's ``confident these issues will not impact growth.'' OCC spokesman Kevin Mukri declined to comment on the acquisition.``The culture of the Commerce bank branches is going to be difficult to maintain if not impossible to maintain,'' RBC Capital Markets analyst Gerard Cassidy said. Keeping branches open seven days a week, one of the perks Commerce offered customers, may prove too costly to continue, he said.

A sale was inevitable once Hill was removed, Cassidy said.

"He was the life and the blood of that organization,'' Cassidy said. ``When he left, it was taking the heart out.''

The Canadian bank will take a pretax charge of $490 million after the purchase is complete for ``technology and human resources'' costs, Colleen Johnston, the chief financial officer, said on a conference call today. The costs aren't related to any securities owned by Commerce.

The bank expects to reduce costs by about $310 million with the merger, starting in 2009, she said. The current management at Commerce will remain, reporting to Bharat Masrani, CEO of TD Banknorth, the banks said. Commerce will record costs of about $150 million in the third quarter after it sells some of its fixed-income securities at a loss.

JPMorgan Chase & Co. and Keefe Bruyette & Woods advised Toronto-Dominion, with Simpson Thacher & Bartlett LLP as legal advisers. Goldman Sachs Group Inc. worked with Commerce, as did Sullivan & Cromwell LLP.
Breaking Views, Antony Currie, 2 October 2007

Toronto Dominion Bank is paying a pretty sum to snap up New Jersey-based Commerce Bank. The $8.5bn price tag equates to 22.5 times next year's earnings. That's a quarter higher than the average large bank deal in the last five years, according to Deutsche Bank. And this for a bank that recently had to fire its scandal-tinged founder and chief. Little wonder, then, that shareholders have wiped as much as $3bn off the value of the Canadian bank's value. At the price TD is paying the deal is a risky one, but it has its merits.

Acquiring Commerce extends TD's US presence from the New England franchise it picked up with BankNorth down into New York and New Jersey. Not only is that a coveted banking region, but the proximity of the two should bring significant cost savings --$310m according to TD. Taxed, discounted and put on a multiple of 10, these are worth just over $2bn to shareholders today. That easily covers the $840m premium TD is paying. And it's not all TD can eke out of the deal.

Both banks look overcapitalised - Commerce Bank, with a tier one capital ratio of 11.7%, more so than its new owner. TD could free up some of that, much as Bank of America is doing with LaSalle Bank, which it purchased from ABN Amro.

TD can also improve returns from Commerce's sluggish approach to deploying its deposits. At just 65 basis points, the New Jersey bank's return on assets is among the lowest in the industry. Its loan-to-deposit ratio is just 36% - almost half TD's - while more than half of its assets, or $27bn, are shunted into securities. That's hardly been successful. Indeed, Commerce has taken a few hits when it had to restructure its portfolio after being overwhelmed by yield-curve swings.

Shifting $20bn of Commerce's assets from securities back into more-profitable loans could boost Commerce's earnings by almost a third, according to Deutsche Bank. That could be worth more than $1bn to TD's shareholders. But perhaps the mere thought of all those securities is what has them spooked. After the ructions of the summer, it is understandably hard to get excited about paying up to buy a portfolio of fixed-income securities.
The Globe and Mail, John Partridge, 2 October 2007

Canada's two largest banks announced early Tuesday they are spending almost $11-billion (U.S.) to expand in the United States and the Caribbean, riding on the wings of the soaring Canadian dollar.

With the loonie now at or above par with the greenback for the first time in more than 30 years, No. 2-ranked Toronto-Dominion Bank stole the show by announcing its biggest acquisition to date: a deal to double its U.S. retail banking presence by taking over Commerce Bancorp Inc. for $8.5-billion in cash and stock — a transaction made possible in part by regulatory problems that led to the ouster of the New Jersey bank's founder at the end of July.

The news of TD's planned acquisition overshadowed confirmation from No. 1-ranked Royal Bank of Canada that it is buying Trinidad & Tobago's RBTT Financial Holdings Ltd. for $2.2-billion, in one of the largest recent acquisitions in the Caribbean.

But observers say there is little question that the high-flying loonie will make both deals easier for the acquiring banks to swallow.

“I'm quite sure that had a lot to do with the transactions,” said Neil Andrew, associated portfolio manager at Leeward Hedge Funds in Toronto. “It's certainly very timely.”

“TD has very aggressively taken advantage of the low U.S. dollar, and the valuation discounts that the U.S. financials have been trading on,” analyst John Aiken at Dundee Securities in Toronto told clients in a note, adding in all capital letters for emphasis that he “would not be surprised to see other Canadian financial institutions make large acquisitions in the U.S. in the near term.”

As well, unlike many of their U.S. counterparts, Canadian banks have so far suffered little in the way of collateral damage from the global credit squeeze triggered by the meltdown of the U.S. subprime mortgage market, and analyst Brad Smith at Blackmont Capital in Toronto said it was only a matter of time before they moved to take advantage of the situation.

“The [TD] deal is consistent with our belief that domestic banks would be tempted to use the current credit market disruption to extend their U.S.-centric retail banking strategies,” he said in a note to clients Tuesday.

Based in Cherry Hill, N.J., Commerce Bank has about 2.4 million customers, 460 branches and 700 automated banking machines throughout New Jersey, New York, Connecticut, Delaware, Washington D.C., Virginia, Maryland and Southeast Florida, TD said Tuesday morning. It also has about $48-billion in assets, $44-billion in deposits and 15,000 employees.

“Acquiring Commerce Bank offers a singularly unique and compelling opportunity for our shareholders — one that is both a strategic fit and a superior value creation opportunity through accelerated organic growth,” TD Chief Executive Officer Ed Clark said in a news release, calling the acquisition a “singularly unique and compelling opportunity” for TD shareholders.

“The combination of Commerce with TD Banknorth doubles the scale of our U.S. banking business and accelerates our transformation to a leading North American financial institution.”

Assuming a sweeter competing bid for the U.S. bank does not knock TD out of the game, the deal still must be approved by regulators and Commerce Bank's shareholders.

The proposed acquisition comes about three years after TD broke into U.S. retail banking with the $3.8-billion acquisition of Banknorth Group Inc. of Portland, Me. Since renamed TD Banknorth, it now has more than $40-billion in assets and about 600 branches and 700-plus ABMs in Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, and Vermont. TD also owns 40 per cent of U.S. online brokerage TD Ameritrade.

The Commerce Bancorp deal also comes about two months after CEO Vernon Hill II, a powerful figure in New Jersey business and politics, was forced to step down by the board of directors. This came after he fell afoul of bank regulators for awarding tens of millions of dollars in contracts, including $50-million to his wife to redecorate the bank's branches.

Gerard Cassidy, a U.S. bank analyst in Portland with RBC Capital Markets, said Commerce Bank would not have been sold without Mr. Hill's departure.

“Absolutely not,” he said in a telephone interview. “Vernon Hill was going to be with this bank for a very long time if it wasn't for his untimely exit this past summer when the regulators pushed him out. This man lived and breathed Commerce Bancorp.”

TD said the purchase price for translates to $42 a share for the U.S. bank. Payment will consist of $10.50 in cash and 0.4142 of a TD share for each Commerce Bancorp share.

That's a premium of just 5.7 per cent to the $39.74 at which Commerce Bank's shares closed Monday — up 96 cents or 2.5 per cent — on the New York Stock Exchange, having hit a 52-week high of $39.97 during the session.

However, Mr. Cassidy said a takeover premium has been built into the U.S. bank's shares since shortly Mr. Hill's departure, as analysts and investors speculated it would not remain independent for long. The price has risen to current levels from just over $33 in early August.

He also said the small additional premium in the TD deal reflects the difficult the Canadian bank likely faces in integrating Commerce Bank's operations into those of TD Banknorth, whose own integration has been problematic.

“The integration is going to be difficult because of the culture of Commerce,” he said. “It is a culture of enthusiasm and sales, with the customer always being right. Plus, they provided a level of customer service that was very costly.”

Characterized by such things as seven-day-a-week service, and paying top dollar for the best and most convenient locations, the service level has left Commerce Bank with a level of profitability among the lowest of the top 50 U.S. banks, Mr. Cassidy said.

Still, like Mr. Andrew at Leeward, he agreed the Canadian dollar's strength will help lighten TD's load. “That certainly helps the transaction, there's no doubt about it,” he said.

TD shares, meanwhile, were down $4.11(Canadian) to $72.23 on the Toronto Stock Exchange.

The bank, Canada's second largest by stock market capitalization ($52.7-billion) and assets ($404-billion) said that adding Commerce Bank to its empire would give it a total of more than 2,000 branches in the United States and Canada and approximately one-quarter of a trillion dollars in deposits. This, it added, would make it the seventh-largest bank in North America as measured by branch locations.

Commerce Bank chairman Dennis DiFlorio said in the news release that “joining forces with TD ... opens the door to tremendous new growth opportunities.”

TD Banknorth CEO Bharat Masrani, meanwhile, said the acquisition will “give us scale in the Mid-Atlantic and will allow us to turbo-charge our organize growth strategy.”

TD said Mr. DiFlorio, along with Commerce Bank's new CEO Bob Falese will continue to run the U.S. bank and report to Mr. Masrani.

Assuming it receives all the necessary approvals, TD expects the deal to close next March or April. It said that once the purchase is completed, it will take a one-time restructuring charge of about $490-million (U.S.) before taxes.

TD also indicated that the acquisition will not be profitable immediately, saying it will likely reduce profit by 28 cents a share in fiscal 2008 and by 22 cents in 2009 on the basis of generally accepted accounting principles. On an “adjusted” basis, this will translated into a 10 cent reduction in 2008 and break-even the next year, the bank said.

Commerce Bank, meanwhile, expects to take an after-tax charge of $150-million (U.S.) related to the planned sale of a portion of its fixed-rate investment securities portfolio, which it is undertaking to reduce its exposure to interest rate changes.

It also said it has agreed, following closing, to negotiate the sale of its Commerce Banc Insurance Services Inc. to the unit's chairman and CEO George Norcross III.

Commerce Bank reported a profit of $154.8-million or 79 cents a share on revenue of $1.01-billion in the six months ended June 30. This compared with a year-earlier profit of $156.8-million or 82 cents a share on revenue of $900.8-million.

As for TD, it put $3.16-billion (Canadian) or $4.34 a share on the bottom line – adjusted for unusual items – on revenue of $10.6-billion in the 9 months ended July 31. This compared with $2.5-billion or $3.46 a share on revenue of $9.8-billion in the comparable period of fiscal 2006.