Capital One Set To Acquire Credit Card Issuer Discover In A $35.3 Billion All-Stock Deal

The Warren Buffett-backed US consumer bank Capital One is set to acquire US credit card issuer Discover Financial Services in a $35.3 billion all-stock deal to create a global payment giant, Capital One said in a statement on Monday. The companies expect to close the deal by late 2024 or early 2025.

If the deal goes through, Capital One shareholders will own 60% of the combined company stock while Discover shareholders will hold 40% of stock. The all-stock transaction will come at a premium of 26.6% based on Discover's closing price of $110.49 on February 16. Thus, shareholders will get 1.0192 Capital One shares for each Discover share they own.

The bank announced that the merger will create a "global payments platform at scale, with 70 million merchant acceptance points in over 200 countries and territories." The combined entity is expected to form the sixth-largest U.S. bank by assets, competing with JPMorgan Chase and Citigroup. 

While Discover has a market value of roughly $28 billion, Capital One's market value is over $52 billion. Thus, the merger will contribute to a significant expansion of the company’s clout in the financial services sector.

Furthermore, Capital One stated that the deal will leverage the benefits of its 11-year technology transformation over a larger enterprise and generate $2.7 billion in pre-tax synergies and a return on invested capital (ROIC) of 16% by 2027.

Discover is among the largest credit card issuers in the U.S., thus, the merger would also expand Capital One’s credit card offerings and its deposit base. Last year, Discover bought digital concierge service Velocity Black, a premium credit card and luxury market platform.

A major credit card issuer and the ninth-largest bank in the U.S., Capital One primarily uses Visa and Mastercard, but it intends to keep the Discover brand and offer cards through its network. 

This merger would be one of the largest deals of this year. However, the transaction is subject to the satisfaction of customary closing conditions such as regulatory approvals and approval by each company's shareholders. The deal is also expected to receive intense antitrust scrutiny, according to Reuters.

The publication mentioned that the deal comes at a time when President Joe Biden's administration has focused on boosting competition in the economy, including a 2021 executive order aimed at bank deals. The executive order requires bank regulators and the Justice Department to review their bank merger policies.

The DOJ had previously that it would consider a broader range of factors when assessing bank mergers for antitrust issues, the report added.

"I predict that this deal...will provoke a significant push-back and receive heightened regulatory scrutiny," Jeremy Kress, professor of business law, University of Michigan, told Reuters.

Despite experiencing declines in profitability during the fourth quarter due to factors such as rising interest rates and heightened provisions for bad loans, both companies are well-positioned to navigate regulatory challenges and continue pursuing their strategic growth objectives.