Shares of Ally Financial (ALLY) are under pressure on Wednesday after the company announced that it is acquiring CardWorks in a cash and stock transaction valued at approximately $2.65B. Following the announcement, Piper Sandler analyst Kevin Barker told investors that he believes Ally paid a "steep" price, an opinion shared by his peer at Credit Suisse.

CARDWORKS ACQUISITION: Ally Financial announced that it has entered into a definitive agreement to acquire CardWorks in a transaction valued at approximately $2.65B. Cardworks is a privately held company with $4.7B in assets and $2.9B in deposits. Under the terms of the agreement, Merrick Bank, a wholly-owned subsidiary of CardWorks, will merge into Ally Bank. Consideration for the transaction will include approximately $1.35B of cash and $1.3B in Ally common stock, or 39.5M shares. The acquisition, which is subject to customary regulatory approvals and closing conditions, is expected to close in the third quarter of 2020. Each company's board of directors has unanimously approved the acquisition.

Don Berman, Chairman, CEO and Founder of CardWorks, owns 70% of CardWorks and will receive a combination of cash and Ally common stock as his consideration. Shares of Ally common stock granted to Berman will be subject to a lock-up agreement restricting the sale or transfer of 100% of his shares until the one-year anniversary of the closing date, at which point Berman can sell or transfer up to one-third of his shares. On each subsequent anniversary, Berman will be permitted to sell or transfer up to another one-third of his shares. As a result, three years after the close of the transaction, Berman may sell or transfer any remaining shares of Ally common stock.

'STEEP' PRICE: Commenting on Ally's acquisition of CardWorks, Piper Sandler analyst Kevin Barker argued that the former paid a “steep” price in order to diversify the company’s product offering and would have preferred Ally organically build a card offering or deployed capital elsewhere. The analyst would expect shares to underperform peers due to the tangible book value dilution from the deal. He has an Overweight rating and a $41 price target on Ally's shares.

In a research note following the announcement, Credit Suisse analyst Moshe Orenbuch noted that while management has indicated that the deal will be accretive to returns and earnings per share and will not materially impact capital levels, he is always "a bit more cautious" about the effectiveness of diversification efforts. Further, Orenbuch pointed out that there may be execution risk around the acquisition, particularly on cross-sell and integration. Highlighting that the deal price "is high," the analyst kept an Outperform rating and a $39 price target on Ally's shares.

Meanwhile, JPMorgan analyst Richard Shane said that he expects Ally’s shares to trade lower as investors weigh the benefits of modest earnings accretion and portfolio diversification against the increased risk profile of non-prime card lending. While Ally’s return on average tangible common stockholder's equity will be enhanced, ROTCE volatility will also increase, which will be a primary concern for investors, he contended. Long-term, Shane sees the benefits of layering a highly profitable card business onto one of the leading online banking platforms. Ally's core auto business should continue to deliver predictable returns, and he believes that cross-selling opportunities between the auto, card, brokerage and depository businesses will be compelling. The analyst has a Neutral rating on Ally's shares.

PRICE ACTION: In afternoon trading, shares of Ally Financial have dropped over 11% to $28.43.