Capital One’s Acquisition of Discover Financial: A High-Stakes Game
In a surprising move, Capital One has announced its plans to acquire rival credit card player Discover Financial in an all-stock transaction valued at a whopping $35.3 billion. This blockbuster takeover proposal has left many in the industry intrigued, especially considering the significant financial implications involved.
One aspect of the deal that has caught the attention of industry watchers is the inclusion of a $1.38 billion breakup fee if Discover decides to go with another buyer. This fee, in line with the typical breakup fee in bank deals, is designed to motivate both parties to close the transaction and ensures that Capital One is compensated if Discover backs out. However, it is worth noting that no fee will be incurred if U.S. regulators block the deal.
Breakup fees have become a common practice in the industry, often resulting in massive payouts when deals sour. For example, AT&T famously paid an estimated $6 billion to T-Mobile after its 2011 takeover attempt was abandoned due to opposition from the U.S. Department of Justice. The inclusion of a breakup fee in the Capital One-Discover deal signals the seriousness of this transaction and the commitment of both parties to see it through.
However, one cannot ignore the potential roadblocks that lie ahead. U.S. banking regulators have been known to block deals on antitrust grounds, and the current regulatory environment is considered hostile towards bank mergers. With an election year underway, the outcome of this deal remains uncertain.
Capital One CEO Richard Fairbank remains optimistic about securing regulatory approval, stating during a conference call that he believes he is “well-positioned” for success. Both companies have been proactive in keeping their regulators informed, which could work in their favor. However, gaining approvals from the Federal Reserve, the Office of the Comptroller of the Currency, and potential intervention from the Justice Department is no easy feat.
Interestingly, the deal between Capital One and Discover did not involve an extensive search for potential bidders. It was a result of Capital One approaching Discover directly, signaling the confidence Capital One has in this specific partnership. This targeted approach may have its advantages, as it reduces the chances of a rival bid emerging from left field.
As shareholders prepare to vote on the transaction, Discover will have the opportunity to entertain proposals from other deep-pocketed bidders. However, if it ultimately decides to go with another offer, it will owe Capital One the hefty breakup fee of $1.38 billion. This financial commitment serves as a powerful deterrent for other potential suitors, further solidifying Capital One’s position.
The Capital One-Discover acquisition is undoubtedly a high-stakes game, with billions of dollars on the line. Whether it will pass the regulatory hurdles and emerge as the dominant force in the credit card industry remains to be seen. As the industry eagerly awaits the outcome, one thing is certain: this deal has shaken up the financial world and left competitors on edge.
