What happened
Shares of Ally Financial (ALLY -1.56%) fell more than 10% on Wednesday after the online bank announced a $2.65 billion deal to acquire subprime lender CardWorks. The deal would diversify Ally's offerings, but at a steep price.
So what
Ally is paying $1.35 billion in cash and 39.5 million shares for CardWorks, a privately held lender with $4.7 billion in assets and $2.9 billion in deposits. Ally, which is primarily an auto lender, issued a statement saying that buying CardWorks would diversify its product offering by adding an established credit card platform and a nationwide merchant acquiring business.
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Upon completion of the transaction, Ally will provide service to a combined 11 million customers spread across all 50 states.
"This acquisition serves as an important milestone in Ally's evolution to be a full-service financial provider for our customers," CEO Jeffrey J. Brown said in a statement. "Beyond the compelling strategic rationale and financial enhancements this transaction brings, CardWorks is an ideal cultural fit for Ally. Both companies share a deep-rooted history of disciplined risk management and an obsession over the customer."
Now what
The deal would expand Ally's offering, but with CardWorks valued at about 1.8 times tangible book value, the transaction is on the pricey side.
Ally's desire to push into new businesses and diversify away from autos is admirable, and buying CardWorks would achieve that diversification much faster than organic investment could. But the company is going to have to show it can integrate the business successfully. For now, investors appear skeptical.
