Capital One announced Monday that it would acquire Discover Financial Services in an all-stock transaction valued at $35.3 billion, a deal that would combine two of the largest credit card companies in the United States.
“A space that is already dominated by a relatively small number of mega players is getting a little smaller,” said Matt Schulz, chief credit analyst at LendingTree.
Capital One is one of the country’s largest banks with $479 billion in assets and issues credit cards through Visa and Mastercard networks. The acquisition of Discover gives the company access to a credit card network with 305 million cardholders, expanding its customer base to more than 100 million. The country’s four largest networks are American Express, Mastercard, Visa and Discover, which have significantly fewer cardholders than their competitors.
As part of the acquisition, Capital One will pay Discover shareholders a 26 percent premium based on the company’s closing price on Friday. Upon completion of the transaction, which is subject to regulatory approval and expected to occur in late 2024 or early 2025, Capital One shareholders will own approximately 60 percent of the combined company and Discover shareholders will own the remainder.
Discover was worth about $28 billion and Capital One was worth about $52 billion as of Friday’s close.
The deal is part of Capital One’s strategy to build a global payments network and help work directly with merchants and small businesses. And it gives Discover greater opportunities to compete with other credit card companies. Capital One said the agreement would result in pretax savings of $2.7 billion.
“Our acquisition of Discover is a unique opportunity to bring together two highly successful companies with complementary capabilities and franchises and build a payments network that can compete with the largest payments networks and payment companies,” Richard Fairbank, founder, chairman and CEO of Capital One, said in the statement.
In June, Capital One acquired Velocity Black, a digital concierge company that bundles travel, entertainment, shopping and dining offerings for consumers.
Discover is emerging from a period of turmoil. The company’s former chief executive, Roger Hochschild, resigned in August amid a regulatory review of misclassified credit accounts. In October, the company said it was taking steps to improve its corporate governance, and in December it announced its new chief executive, Michael G. Rhodes. The company’s profit fell 62 percent in the fourth quarter of 2023 compared to the same period last year.
The once-giant retailer Sears introduced the Discover card in 1985. Discover later became part of Morgan Stanley before the investment bank spun it off through an initial public offering of shares in 2007.
Capital One’s acquisition will be one of the first tests of regulatory scrutiny of banking operations since the Office of the Comptroller of the Currency announced last month that it planned to slow merger and acquisition approvals.
“It’s hard to say which direction it would go, but because of the money and the size of the companies involved, this deal will certainly receive a lot of attention,” said Mr. Schulz, the author of the forthcoming book. Ask questions, save money, earn more: How to take control of your financial life.”
Given Discover’s recent challenges, the question is whether “regulators view this as a white knight helping to fix a troubled entrant, or whether they view this as restricting competition – and therefore something that “It is something to be avoided,” said David Schiff. Senior Partner at West Monroe, a digital services company.
To make matters worse, other deals in the financial industry have come under renewed scrutiny, Schiff said. This includes New York Community Bank’s acquisition of signature Bank’s billion-dollar assets during the regional banking crisis. Much of New York Community Bank’s problems stem from the weakening commercial real estate market, but Mr. Schiff said politicians could cite the deal as an example of one that regulators approved too quickly.
Consumer advocates rejected the potential deal, saying it raised antitrust concerns. “It is very difficult to imagine how federal regulators could allow Capital One to buy Discover, given that mergers must benefit both the public and insiders,” Jesse Van Tol, executive director of the National Community Reinvestment Coalition, said in an explanation.
Rob Copeland contributed reporting.
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2024-02-20 01:38:18
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