When a bunch of barbarians show up at your front gate, you'd better at least check and see what they want. In the case of New York's North Fork Bank (NYSE:NFB), the barbarian emissaries of Capital One (NYSE:COF) wanted to deal, and a bargain was struck.
Capital One, best known for its credit card business and often-amusing commercials, is buying this large regional bank for a total consideration of about $14.6 billion. Assuming that the deal gets the various approvals needed, North Fork shareholders will get $11.25 in cash and approximately 0.22 shares of Capital One for each of their shares.
Much to even my own surprise, I like this deal. Capital One is buying a large and very well-run franchise at a price that compares pretty favorably to historical valuations and present-day levels for other large regional banks. What's more, Capital One is taking the chairman of North Fork and putting him in charge of all of their banking operations (including Hibernia, which Capital One bought last year). Given North Fork's track record in building a low-cost deposit base and producing good efficiency ratios and return on assets, that could prove very valuable down the line.
But, you ask, isn't the banking business dangerous these days, with a flat (and sometimes inverted) yield curve and a sharp overhang in the housing business? Well, if you think that housing is just going to implode and drive the country into depression, I guess the answer would be "yes." Personally, I don't see that happening.
Instead, I see Capital One diversifying its business away from credit cards while simultaneously gaining access to low-cost deposits. Cost of funds is important in almost every aspect of financial institutions, so I see that as a sound long-term strategic move. What's more, Capital One will now be among the ten largest banks in the country (by deposits) and will likely be better able to compete with the likes of Bank of America (NYSE:BAC) and Citigroup (NYSE:C).
It's always dangerous to extrapolate big trends from a single deal, but I wonder if we're not about to begin seeing some of that long-awaited consolidation in the banking industry. Valuations aren't all that high, and we might be seeing the beginning of another arms race where large banks feel they have to get even larger if they are to continue to compete effectively.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
