Capital One, a U.S. consumer lender backed by Warren Buffett, said on Monday that it will acquire credit card issuer Discover Financial Services in an all-stock transaction valued at $35.3 billion. Visa, Mastercard, and American Express are among other U.S.-based payments networks.
The Capital One and Discover deal, which will combine two of the largest U.S. credit card companies, aims at building “a payments network that can compete with the largest payments networks and payments companies,” Richard Fairbank, chairman and CEO of Capital One, said in a statement.
Capital One buys Discover
Discover financial acquisition will give its shareholders 1.0192 Capital One share for each Discover share. It represents a 26.6% premium over Discover’s closing price on Friday.
When concluded, Capital One shareholders will own 60% of the combined company, while Discover shareholders will own approximately 40%, according to the statement.
According to Nilson, Capital One valuation at $52.2 billion, is the fourth largest player in the U.S. credit card market by volume as of 2022, while Discover is the sixth.
Capital One Discover deal intense scrutiny
The deal is expected to be approved by regulators late 2024 or early 2025, Capital One said.
The transaction is likely to experience intense scrutiny as Democratic President Joe Biden’s administration continues to focus on boosting competition in all areas of the economy, including a 2021 executive order aimed at bank deals.
Bank consolidation
Democratic progressives have long fought bank consolidation, arguing it increases systemic risk and hurts consumers by reducing lending, and have stepped up pressure on regulators to take a tougher stance on deals.
The pressure intensified following deals aimed at rescuing failed lenders last year, including JPMorgan’s JPM.N purchase of First Republic Bank.
The Biden administrations’ executive order required bank regulators and the Justice Department to review their bank merger policies.
The DOJ subsequently said it would consider a broader range of factors when assessing bank mergers for antitrust issues, while the Office of the Comptroller of the Currency last month proposed scrapping its fast-track review process.
Combined entity
By assets, Discover was the 27th largest U.S. bank with nearly $150 billion in assets, according to December Federal Reserve data ranking insured U.S. banks, while Capital One was the ninth-largest with $476 billion in assets.
The combined entity would be the sixth-largest U.S. bank, the Fed data shows.
While the pair overlap in some areas of the credit card business, Discover is one of the four major U.S. credit card processors. This was along with Visa, Mastercard and American Express, which facilitate credit card payments. Making it a potentially valuable source of fees for Capital One.
The Capital One Discover deal also would come at time of increased regulatory focus on credit card fees, which are the subject of strict new rules proposed by the Consumer Financial Protection Bureau.
Regulatory challenges
In late 2023, Discover said it was exploring the sale of its student loan business and would stop accepting new student loan applications in February.
The company, led by TD Bank Group veteran Michael Rhodes, has faced some regulatory challenges.
It disclosed in July a regulatory review over some incorrectly classified credit card accounts from mid-2007.
In October, Discover said it agreed to improve its consumer compliance and related corporate governance. This was as part of a consent order with the Federal Deposit Insurance Corp.
While supervisory issues are an obstacle for deals between financial firms, regulators are more amenable when problems are with target company. Also the acquirer is considered a good actor, according to legal experts.
Discover and Capital One reported 62% and 43% falls, respectively, in fourth-quarter profit. As banks increased provisions for losses from bad loans as rising interest rates raised the risk of consumer defaults on credit card debt and mortgages.
