Capital One to acquire Discover, creating a consumer lending colossus

Capital One to acquire Discover, creating a consumer lending colossus

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

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

Capital One, with $479 billion in assets, is one of the nation’s largest banks and issues credit cards on networks managed by Visa and Mastercard. The Discover acquisition 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 major networks are American Express, Mastercard, Visa and Discover, which has far fewer cardholders than its competitors.

But consumer rights advocates rejected the potential deal, saying it raised competition concerns. “It is very difficult to imagine how federal regulators could allow Capital One to buy Discover given the requirement that mergers benefit the public as well as insiders,” said Jesse Van Tol, chief executive officer of National Community Reinvestment Coalition, in a press release.

The acquisition by Capital One will be one of the first tests of regulatory control over banking transactions since the Office of the Comptroller of the Currency said last month that it intended to slow merger and acquisition approvals.

“It’s hard to know which direction this would go, but there will certainly be a lot of attention paid to this deal because of the money and the size of the companies involved,” Mr. Schulz said.

Complicating the landscape is the fact that other deals in the financial sector have come under increased scrutiny, said David Schiff, senior associate at West Monroe, a digital services consulting firm. These include New York Community Bank’s acquisition of billions in assets from Signature Bank during last year’s regional banking crisis.

New York Community Bank recently reported a big loss for its latest quarter and said it would set aside more capital to serve as a buffer against future problems. Much of its problems stem from a weakening commercial real estate market, but Mr. Schiff said politicians could point to this deal as an example of a deal that regulators were too quick to approve.

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 transaction, which is subject to regulatory approval and is 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 $28 billion as of Friday’s market close, and Capital One was valued at about $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. And that gives Discover greater scale to compete with other credit card companies. Capital One said the deal would generate $2.7 billion in pre-tax savings.

“Our acquisition of Discover is a unique opportunity to bring together two highly successful companies with complementary capabilities and franchises, and build a payments network capable of competing with the largest payment networks and companies,” Richard Fairbank, Founder, Chairman and chief executive officer of Capital One, said in the release.

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 chief executive, Roger Hochschild, resigned in August amid a regulatory review of misclassified credit accounts. In October, the company announced it was taking steps to improve its corporate governance, and in December it announced the appointment of its new chief executive officer, Michael G. Rhodes. The company’s profit in the fourth quarter of 2023 fell 62% compared to the same period of the previous year.

Former giant retailer Sears introduced the Discover card in 1985. Discover then became part of Morgan Stanley before the investment bank spun it off through a 2007 stock IPO.

Given Discover’s recent challenges, the question is whether “regulators view this as a white knight coming in to help fix a struggling player in the market or whether they view this as limiting competition – and therefore something to avoid,” Mr. Schiff said. .

Rob Copeland reports contributed.

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David B.Otero

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