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 merge 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 about to get a little smaller,” said Matt Schulz, chief credit analyst at LendingTree.
Capital One, with $479 billion in assets, is one of the nation’s largest banks and issues credit cards on networks run by Visa and Mastercard. The acquisition of Discover will give it access to a credit card network of 305 million cardholders, adding to its base of more than 100 million customers. The country’s top four networks are American Express, Mastercard, Visa and Discover, which has far fewer cardholders than its competitors.
As part of the acquisition, Capital One will pay Discover shareholders a 26 percent premium based on the company’s closing stock price on Friday. Upon closing of the deal, which is subject to regulatory approval and expected 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 valued at about $28 billion when the market closed on Friday, and Capital One was valued at about $52 billion.
“Our acquisition of Discover is a unique opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and companies,” Richard Fairbank, founder, president and director executive. of Capital One, said in the statement.
In June, Capital One acquired Velocity Black, a digital concierge company that brings together travel, entertainment, shopping and dining offerings for consumers.
Discover is emerging from a period of turbulence. The company’s former CEO, 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 earnings in the fourth quarter of 2023 fell 62 percent from the same period a year earlier.
Once retail giant Sears introduced the Discover card in 1985. Discover later became part of Morgan Stanley before the investment bank spun it off in an initial public offering in 2007.
The acquisition by Capital One will be one of the first tests of regulatory scrutiny over banking deals since the Office of the Comptroller of the Currency said last month that aimed at slowing down M&A approvals.
“It’s hard to know which way it will go, but there will certainly be a lot of attention paid to this deal because of the money and magnitude of the companies involved,” said Mr. Schulz, 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 see this as a white knight coming to help fix a troubled player in the market or whether they see it as limiting competition and therefore something to avoid,” said David Schiff. Senior partner at West Monroe, a digital services company.
Complicating the picture is the fact that other deals in the financial industry have come under renewed scrutiny, Schiff said. These include New York Community Bank’s acquisition of billions of assets from Signature Bank during the regional banking crisis. Much of New York Community Bank’s problems stem from the weakening commercial real estate market, but Schiff said politicians could point to 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 purchase Discover given the requirement that mergers benefit both the public and insiders,” Jesse Van Tol, executive director of the National Community Reinvestment Coalition, said in a statement. .
Rob Copeland contributed reports.
