Capital One & ING Direct, Setting Off The Next Wave of Banking M&A (COF, ING, GE, RF, BAC, JPM, ETFC)

Capital One Financial Corporation (NYSE: COF) may have just wiggled its way into being one of the few top banks in America.  The company is acquiring ING Direct USA from ING Groep NV (NYSE: ING).  The deal is a whopping $9 billion transaction, and this is after reports that both Capital and General Electric Co. (NYSE: GE) were both rumored to have serious bidding interest for what is effectively one great online banking institution.

Capital One will fund the $9 billion cash-and-stock deal with $6.2 billion in cash and the remainder in stock.  Capital One plans to raise some $2 billion in new equity capital and it will raise $3.7 in debt to meet capital requirements related to the transaction.

Here is what is amazing in the world of “Too Big to Fail”…. The acquisition elevates Capital One from eight place to fifth among US retail banks.  There is another deal that recently went off and that was where Regions Financial Corporation (NYSE: RF) basically acquired $1 billion in credit card assets.  The Regions deal is a tiny fraction compared to this one.

Before you get too excited and wonder which companies will next be acquired by Bank of America Corporation (NYSE: BAC) or J.P. Morgan Chase & Co. (NYSE: JPM), you need to remember two things.  Those banks are in the “Too Big To Fail” club and the only way regulators are going to ever approve any deals for those two is if they are the only ones which can bail out another big failed institution.  Jamie Dimon is not partial to more deals as far as we are concerned, and Bank of America is already above that 10% deposit cap so it cannot acquire more depository institutions.

Once identified largely as a credit card issuer, the transaction transforms Capital One into one of the largest retail banks in the country.  The company is also accomplishing this without wasting money by having branch locations at every major intersection around the United States as you see with the other “Too Big to Fail” banks.

Integral with the deal, Capital One gets ING Direct USA’s $92 billion in assets, of which $40 billion are mortgage loans, 7.7 million customers, and the organization’s penchant for gathering deposits.

Prospectively, Capital One expects to realize $90 million in cost savings from combining the two banks and $200 million annually as it scales back efforts to grow its deposit base.  Our take is that the cost savings may be tiny in comparison to the added growth that this brings Capital One.

As a result of the transaction ING will own a 10 stake in Capital One making it the largest shareholder. Before the effects of any added shares or added debt, Capital One has a market capitalization of roughly $22 billion.  At $48.75, its 52-week trading range is $36.10 to $56.26.  For whatever it is worth, this stock was above $80.00 before the meltdown turned into The Great Recession.

When Capital One advertises “What in your wallet?” you can think, ING.

Our take… When you consider what Capital One has accomplished here and when you consider the Regions deal, the banks that are not quite “too big to fail” are likely to increase their merger and acquisition strategies if the deals can come with cost synergies and generate accretive earnings opportunities.

Lastly, we are asked from time to time which companies in which sectors we think will make great takeover targets ahead.  Our pick on that front remains E*TRADE Financial Corporation (NASDAQ: ETFC).  With a market cap of just over $3 billion and brokerage accounts numbering close to 2.8 million, there is value there as it keeps seeing improved credit metrics that are left over from its days or trouble.  E*TRADE is also back to being profitable again and that is expected to remain the case ahead.

JON C. OGG