Peter Eavis
It's one of the oldest tricks in the book: A company announces a big acquisition just before it hits a rough patch so that it can divert attention from its troubles and cloud its financial results.
With perfect timing, Capital One (COF Quote - Cramer on COF - Stock Picks) is playing that trick with its planned purchase of southern bank Hibernia (HIB Quote - Cramer on HIB - Stock Picks), a deal that was announced Monday. Capital One, arguably the nation's most aggressive credit card lender, reported a weak fourth quarter, in which it blew over $500 million on marketing and got surprisingly puny account growth in return. It was a stark sign that Capital One is finding it very hard to compete against much bigger credit card lenders, such as Citigroup (C Quote - Cramer on C - Stock Picks), Bank of America (BAC Quote - Cramer on BAC - Stock Picks) and J.P. Morgan Chase (JPM Quote - Cramer on JPM - Stock Picks). Clearly, another quarter of worse-than-expected numbers would have sent Capital One's stock diving. Unless, of course, the company could point to something that radically changes its outlook. And the acquisition of Hibernia is supposed to do just that. Capital One was up $2.68, or 3.6%, to $78.68 Tuesday. According to the proposed terms of the deal, Capital One is spending over $5 billion on Hibernia, which works out at 18 times earnings -- a pricey multiple for a bank, especially one with a history of blowing up like Hibernia. To be sure, Capital One's bashers have a number of reasons to be slightly less negative after the deal. Most important, buying Hibernia will effectively drive down Capital One's cost of borrowing, which is currently above levels of its main competitors. Retail banks like Hibernia are able to amass deposits, which are then used as low-cost funding for loans. Till now, Capital One has had to rely on a mixture of higher-cost deposits and selling loan-backed bonds as its main funding sources.
Sponsored by:
RSS
