Capital One Set to Buy Discover in $35.3B Deal, Aiming to Build Payments Powerhouse

Capital One, a Warren Buffett-backed U.S. consumer bank, gears up to acquire U.S. credit card issuer Discover Financial Services as part of its efforts to create a global payments giant in the United States.

On Monday, Capital One announced that the company is acquiring the said issuer in an all-stock deal valued at $35.3 billion.

According to the reports, the deal aims to make the resulting entity the sixth-largest bank by assets in the U.S., competing against its rivals, Citigroup and JP Morgan Chase, and is expected to face rigorous antitrust scrutiny. Despite Discover's extensive global network spanning 200 countries and territories, the issuer is still behind its rivals, American Express and Visa Mastercard.

"This acquisition adds scale and investment, enabling the Discover network to be more competitive with the largest payments networks," the companies said in an official statement.

Capital One's Ambitious Move

In a report published by Reuters, Discover shareholders are expected to receive "1.0192 Capital One share for each Discover share," representing a "26.6% premium over Discover's closing price" on Friday. Capital Shareholders will then own 60% of the combined company, leaving the remaining stake to Discover shareholders.

A note to clients published by Baird equity research analysts revealed that a Capital One/Discover combination would have "significant strategic merit." They also cited the benefits of having Capital One credit cards utilize Discover's network and the potential for cutting costs that come with a grander scale.

This came after the companies announced they expect to see $2.7 billion in pre-tax synergies in 2027, including network savings and cost-cutting.

Reuters also revealed in its exclusive report that Capital One is currently valued at $52.2 billion, making it the fourth largest player in the U.S. credit card market by volume in 2022, while Discover garnered the sixth place.

The latter will also appoint three members for its new board, although it's unclear how many directors its board would have.

$35.3 billion All-Stock Deal Expected to Take Effect in Late 2024 or Early 2025

Moreover, the regulators are expected to approve the deal in late 2024 or early 2025, Capital One said in a statement.

However, merger experts predicted the deal would face intense scrutiny from regulators due to the U.S. President Joe Biden's administration's focus on boosting competition across various economic sectors, including a 2021 executive order aimed at bank deals.

In a statement, Jeremy Kress, a University of Michigan professor of business law who previously worked on bank merger oversight at the Federal Reserve, said, "I predict that this deal...will provoke a significant push-back and receive heightened regulatory scrutiny."

"It will be the first big test of bank merger regulation since the Biden administration's executive order on promoting competition in 2021," Kress added.

In 2023, Discover announced that it was exploring the sale of its student loan business, claiming that it would stop accepting new student loan applications in February.

Discover and Capital One revealed 62% and 43% profit falls during the fourth quarter, respectively.

Reuters said, "Banks have increased provisions for losses from bad loans as rising interest rates raise the risk of consumer defaults on credit card debt and mortgages."

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