When I heard that Capital One Financial (NYSE: COF) was buying ING's (NYSE: ING) ING Direct segment, my reaction was simple and to the point:
"Aw, crap."
I don't own Capital One stock, nor do I own ING's stock. But I am a customer and big fan of ING Direct, and the last thing I want to see is some main-line bank start meddling with something that's beautiful in its simplicity.
And I know for a fact that I'm not the only one who feels this way. A slide in Capital One's acquisition presentation shows that the "net promoter" score for ING Direct -- that is, the percentage of customers who would recommend the bank -- was 58%, crushing that of Wells Fargo (NYSE: WFC), JPMorgan Chase's Chase Bank, Bank of America (NYSE: BAC), and Citigroup (NYSE: C), which top out at 35% for Wells. Interestingly, Capital One didn't include its own net promoter score in the slide.
Of course Capital One isn't going to issue a statement saying, "Hey ING Direct customers, we're about to screw up your bank!" So, unfortunately, we'll just have to wait to see how much tinkering the new parent ends up doing.
In the meantime, there are a couple of other aspects of the deal that we can take a closer look at.
Too big to fail?
The issue of "too big to fail" has been a hot spot for me ever since Uncle Sam busted open the piggybank to save the massive financial institutions whose failure would have sucked our economy into a black hole. The insanity of the issue is that even as people were pulling their hair out over "too big to fail," Bank of America was acquiring Merrill Lynch and Countrywide, JPMorgan was taking over Bear Stearns and Washington Mutual, and Wells Fargo gulped down Wachovia.
Insanity is ... oh yeah, doing the same thing and expecting different results.
Fast-forward to today and we've got Capital One vaulting into the No. 5 spot among banks in the U.S. based on deposits. Is this yet another "too big to fail" institution making itself even more unwieldy? Fortunately, I think we can answer a solid "no." At the end of the first quarter, Capital One had $199 billion in total assets, so even after adding the $90 billion or so of ING Direct, it will be closer in size to the No. 6 by deposits US Bancorp (NYSE: USB) -- which has just more than $300 billion in assets -- as opposed to the trillions in assets at the big four.
It's also notable that Capital One has recovered relatively well from the financial crisis, reporting net income over the past 12 months that exceeded that of 2006.
But who wins?
In a deal like this, both parties don't win -- it's just not the way it works. In this case, I have to say it's pretty easy to pick a winner: Capital One.
ING had to sell ING Direct as part of a restructuring following its $15 billion bailout from the European Union. If it weren't for this, I don't see why it would have wanted to jettison this asset. Worse still for ING is the fact that the worldwide banking industry is still not exactly on sure footing, so there was little hope for a heated bidding war that would have cranked up a great price for the online bank. GE (NYSE: GE) was supposedly in the mix here, but apparently didn't have the appetite to be particularly aggressive.
From Capital One's perspective, the deal seems pretty sweet, if not an obvious strategic fit. The company noted in its presentation that the purchase price is equal to ING Direct's tangible book value, which is a pretty good price for a financial asset like this. And while management will obviously put rosy assumptions on the deal, I'll also throw out that it sees the deal being accretive to earnings per share in 2012 and offering an overall internal rate of return, or IRR, of 20%.
But what really caught my eye about the deal from Capital One's perspective was this note in its presentation: "Opportunity to swap higher-yield Capital One loans for ING Direct assets." The bulk of ING Direct's assets are low-loan-to-value, high-credit-score mortgage loans, U.S. Treasuries, and agency-backed mortgage-backed securities. If Capital One can shift some of these lower-yielding assets to higher-yielding credit card loans, it could make this deal look pretty darn smart.
Of course, offsetting that is the fact that Capital One doesn't exactly have an auspicious acquisition history. Its last big splash was the $14.6 billion takeover of North Fork Bancorp in March of 2006. Yes, that 2006. Is this a chance for redemption? Perhaps, but I couldn't blame investors for being skeptical.
Mark my words, Capital One
Overall, I'd have to give this acquisition a thumbs-up from the perspective of Capital One shareholders. But I'll offer that with the caveat that execution will be key.
As I noted at the beginning, my selfish concerns about Capital One mucking up a good thing at ING Direct are likely echoed by many other ING Direct customers. If Capital One starts monkeying around too much with the ING Direct model, it could alienate customers and sap some (much?) of the rationale for the deal.
You hear that, Capital One? Don't do anything stupid and we'll all get along just fine.
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