Canadian Imperial Bank of Commerce (NYSE:CM) finally did something investors have wanted for years, making a big splash south of the border by spending $4.9 billion to acquire Chicago-based PrivateBancorp.
The deal will be 40% financed by cash on hand and 60% financed by the issuance of more than 30 million new CIBC shares.
When the purchase of PrivateBancorp is complete, CIBC will join the other members of Canada’s "Big Five" banks by finally having significant exposure to the U.S. market.
Shares of CIBC are down approximately 3% in early morning trading on the TSX as traders point to the fact the company paid an expensive multiple of close to 18 times earnings to get this U.S. exposure. CIBC shares, meanwhile, trade hands at closer to 10 times earnings.
Additionally, the deal isn’t expected to add to the company’s earnings per share until after 2017. CIBC’s CFO Kevin Glass told analysts on the conference call that earnings are expected to fall $0.12 per share in the first year as the new prize weighs on the bottom line.
But these are short-term concerns. Analysts have long said the reason why CIBC persistently trades at a lower valuation than its peers is because it had few earnings from outside of Canada. This will change once the PrivateBancorp deal starts adding to the bottom line in 2017.
With concerns like high housing prices and slumping commodity prices potentially leading to tepid growth in the Canadian economy, this diversification should prove to be good news over the long-term. The only question that remains is if CIBC paid too much to acquire its prize.
CIBC shares in Toronto approached noon down $2.65, or 2.6%, to $97.83, within a 52-week trading range of $82.19 to $104.65