Capital One Financial Corp. has announced its plans to acquire Discover Financial Services in an all-stock deal, which is set to create the largest card issuer in the United States. The deal, valued at over $35 billion, will see Discover shareholders receiving 1.0192 Capital One shares for each Discover share, representing a premium of more than 26% to Discover’s closing price on Friday.
The acquisition is seen as a significant opportunity for both companies to combine their successful capabilities and franchises, ultimately building a payments network that can compete with the largest players in the industry. Capital One Chief Executive Richard Fairbank expressed his excitement about the deal, stating, “Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies.”
Piper Sandler analyst Kevin Barker believes that this deal will establish the combined company as the largest card issuer in terms of card loans outstanding, surpassing JPMorgan Chase & Co. He also suggests that the acquisition will drive significant value for both shareholders, as it increases the scale of Discover’s payments platform and reduces the risk of a large reinvestment cycle for Discover through integration on Capital One’s platform.
However, the deal is expected to face significant scrutiny from regulators due to its size, as large bank mergers have been rare in recent years. Despite this, Jefferies analyst John Hecht remains optimistic about the regulatory approval process, stating that he does not see major headwinds from a market share or asset class perspective.
While the acquisition poses potential risks to Visa Inc. and Mastercard Inc., with Capital One potentially steering card volumes to Discover’s rails to save on network fees, analysts believe that the impact on credit-card volumes will not be disruptive. Mizuho analyst Dan Dolev highlights that Capital One could also take advantage of Discover’s debit network to earn more interchange, as most of Discover’s debit transactions are exempt from interchange caps.
Some analysts express concerns about Discover’s weaker brand compared to Visa and Mastercard, particularly among premium cardholders. They believe that this could be an obstacle to Capital One moving its existing credit portfolios issued on the Visa and Mastercard networks to Discover. As a result, they are skeptical that the deal will make Discover a stronger competitor in the industry.
Overall, the acquisition of Discover by Capital One is seen as a strategic move that will create the largest card issuer in the U.S. The deal presents opportunities for both companies to leverage their strengths and build a competitive payments network. While regulatory scrutiny and potential challenges lie ahead, analysts remain cautiously optimistic about the benefits this acquisition could bring to both shareholders and the industry as a whole.
