Capital One Financial Corp. has recently announced its plans to acquire Discover Financial Services in an all-stock deal. This strategic merger is set to create the largest card issuer in the United States, as stated by one analyst. The deal, valued at over $35 billion, involves Capital One purchasing Discover shares at a premium of more than 26% to its Friday closing price.
Capital One’s CEO, Richard Fairbank, sees this acquisition as an opportunity to bring together two successful companies with complementary capabilities and franchises. He believes that combining their strengths will enable them to build a competitive payments network that can rival the largest players in the industry. While Discover is currently the smallest of the four U.S.-based networks, its global payments network is considered rare and valuable.
The merger is expected to establish the combined company as the largest card issuer in terms of card loans outstanding. Piper Sandler’s Kevin Barker notes that the combined company would have approximately $257 billion in card loans outstanding, surpassing JPMorgan Chase & Co.’s $211 billion. Barker believes that this deal will bring significant value to shareholders and reduce the risk of a large reinvestment cycle for Discover through integration on Capital One’s platform.
However, the deal is likely to face significant scrutiny from regulators due to its size and the absence of such a large bank merger in recent years. Despite this, Jefferies analyst John Hecht remains optimistic about the regulatory approval process, stating that he does not see major headwinds in terms of market share or asset class. Hecht acknowledges that timing and nature of regulatory approval can be challenging to predict, especially in an election year.
Mizuho’s Dan Dolev highlights that the combination of Capital One and Discover could pose risks to Visa Inc. and Mastercard Inc. Dolev suggests that Capital One may redirect some card volumes to Discover’s payment network to potentially save on network fees. Currently, Capital One represents approximately 10% of domestic credit volumes as the third-largest issuer of Visa and Mastercard credit cards in the U.S. Dolev also sees opportunities for Capital One to leverage Discover’s debit network to earn more interchange, as most of Discover’s debit transactions are exempt from interchange caps.
Overall, the acquisition of Discover by Capital One is a significant move that will reshape the credit card industry in the United States. With the combined strengths and capabilities of both companies, they aim to create a payments network that can compete with the largest players in the market. However, regulatory scrutiny and potential risks to other major players in the industry will need to be carefully navigated. Nonetheless, this merger has the potential to drive significant value for shareholders and position the combined company as a dominant force in the credit card industry.
