Capital One to Acquire Discover in $35.3 Billion Deal

Capital One announced Monday that it would acquire Discover Financial Services in an all-stock deal valued at USD 35.3 billion, a deal that would merge two of the largest credit card companies in the United States.

“A space that was already dominated by a relatively small number of large players is about to get a little smaller,” said Matt Schulz, chief credit analyst at LendingTree.

Capital One, with USD 479 billion in assets, is one of the nation's largest banks and issues credit cards on networks operated by Visa and Mastercard. Acquiring 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 four largest networks are American Express, MasterCard, Visa, and Discover, which have far fewer cardholders than their competitors.

As part of the acquisition, Capital One will pay Discover shareholders a 26% 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% of the combined company and Discover shareholders will own the remainder.

Discover was valued at about USD 28 billion when the market closed on Friday, and Capital One was valued at about USD 52 billion.

The deal is part of Capital One's strategy to build a global payments network, helping it work directly with merchants and small businesses. It gives Discover greater scope to compete with other credit card companies. Capital One said the agreement would generate USD 2.7 billion in pre-tax savings.

“Our acquisition of Discover is a singular opportunity to bring together two highly 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, chair, and CEO 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 corporate governance, and in December it announced its new CEO, Michael G. Rhodes. The company's profits declined in the fourth quarter of 2023 by 62% compared to the same period of the previous 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 in an initial public offering in 2007.

The acquisition by Capital One will be one of the first tests of regulatory scrutiny of banking deals since the Office of the Comptroller of the Currency said last month that it intends to slow mergers and acquisitions approvals.

“It's hard to know which way it would go, but there will certainly be a lot of interest in this deal because of the money and size of the companies involved,” said Schulz, author of the forthcoming book "Ask the Questions." “Save Money and 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 coming in to help fix a troubled player in the market or whether they see it as reducing competition and therefore should be avoided," David Schiff said a senior partner at West Monroe, a digital services firm.

Complicating the landscape 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 in assets from Signature Bank during the regional banking crisis. Many of New York Community Bank's problems stem from a weak commercial real estate market, but Schiff said politicians could point to the deal as an example of one that regulators were too quick to approve.

Consumer advocates pushed back on the possible deal, saying it posed antitrust concerns. “It is very difficult to imagine how federal regulators could allow Capital One to buy Discover given the requirement that mergers benefit both the public and insiders,” Jesse Van Tol, CEO of the National Community Reinvestment Coalition, said in a statement.

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