Capital One (NYSE:COF) has seemingly always been on the hunt for more loanable funds, and the company has taken a big swing with its acquisition of ING Groep's (NYSE:ING) ING Direct. While there is no question that this acquisition will give Capital One a much larger deposit base, it is not so obvious that the company will turn this into a value-additive deal. (For more on how this deal and others are valued, check out Analyzing An Acquisition Announcement.)

TUTORIAL: Mergers and Acquisitions

Terms of the Deal
Capital One agreed to pay $9 billion for ING's U.S. online banking operations, with $6.2 billion of that coming in the form of cash. With the remainder in stock, ING will be a major shareholder of Capital One. At close to 1 times tangible book value, it may not seem like Capital One is paying all that much, but investors should remember that ING was a highly motivated seller - divesting ING Direct was a requirement as part of the company's bailout.

What Capital One Is Getting
With this deal, Capital One adds about $80 billion in deposits to its franchise and returns to the mortgage business. While Capital One already had its own online bank, ING Direct is arguably the best-known operator of online savings accounts and may enjoy some brand value and distinction. Unfortunately for Capital One, the branch-free model at ING Direct is not quite as profitable as some might imagine and pre-provision earnings of $630 million is not a compelling return on capital. (To help you determine if this acquisition is going to be a success, read What Makes An M&A Deal Work?)

Can Capital One Leverage This Deal?
The real question is not about what ING Direct is today, but what Capital One can do with it in the future. Simply combining the acquisition with Capital One's existing online operations should lead to tens of millions of dollars of cost savings. On top of that, there may be some cross-selling opportunities that will allow Capital One to grow its core consumer lending (credit cards) business on ING Direct's back. While online savings accounts are not exactly cheap money (compared to what banks presently pay for demand deposits or CDs), they are cheaper than equity, trust preferreds, and other sources of funds and the customers are reasonably loyal so long as rates stay competitive.

Capital One has a lot of challenges, though. ING Direct may have pioneered the online savings account and convinced people that it is safe and worthwhile, but the moat is not that wide. Banks like HSBC (NYSE:HBC) and Zions Bancorp (Nasdaq:ZION) have their own offerings. Moreover, the idea of using online savings accounts to fund credit card lending is not exactly new - American Express (NYSE:AXP) and Discover Financial Services (NYSE:DFS) are both in the game as well.

At this point, then, it is fair to wonder whether online savings has become commoditized. Does ING Direct have enough of a reputation advantage to attract customers and enough ease-of-use advantages to keep them when customers can easily choose Ally, HSBC Direct, or other competing products? Likewise, can Capital One cut costs enough to make the returns attractive without compromising its competitiveness?

And don't forget too that Capital One has been trying to compete in traditional branch banking with the likes of PNC (NYSE:PNC), Bank Of America (NYSE:BAC), and Regions (NYSE:RF) in the New York, Washington, DC metro areas, and Louisiana. It's hard enough to do one thing well, let alone trying to operate two very different business models simultaneously. Not only that, but this deal likely minimizes the odds that Capital One will be a player in further branch banking deals. (To learn more on how banking has grown and changed, read The Evolution Of Banking.)

The Bottom Line
Adding $80 billion in deposits at tangible book value is not an opportunity that comes every day. If Capital One works hard and is very careful not to alienate its ING Direct customers, this deal could ultimately be a real winner for the company. Not only is the company going to need to cut expenses on the back end (which should be an attainable goal), but also exploit the deposit base with mortgage and credit lending. But given how many banks have devastated their balance sheets with bad mortgage and credit card lending, that is not a risk-free proposition for shareholders. (For more on online banks, check out Online Banks: Lower Costs And Little Sacrifice.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Credit & Loans

    5 Credit Cards For the Super Rich

    Understand the difference between an average credit card and an elite credit card for the wealthy. Learn about the top five credit cards for the super rich.
  2. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  3. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  4. Credit & Loans

    Explaining Equated Monthly Installments

    An equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
  5. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  6. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  7. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  8. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  9. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  10. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!