Capital One to Acquire Discover Financial in $35.3 Billion Deal
Capital One’s Plan for Acquisition
Capital One, backed by Warren Buffett, has announced its intention to acquire Discover Financial Services in an all-stock deal valued at $35.3 billion. The move aims to create a global payments giant and form the sixth-largest U.S. bank by assets. The deal is expected to receive intense antitrust scrutiny due to its far-reaching implications in the financial sector.
Discover’s Network and Market Position
Despite having a network spanning 200 countries and territories, Discover Financial Services is still smaller than rivals Visa, Mastercard, and American Express. The acquisition by Capital One is seen as a strategic move to enhance Discover’s scale and investment, enabling the network to be more competitive with the largest payments networks.
Shareholder Details and Potential Synergies
Under the terms of the deal, Discover shareholders will receive 1.0192 Capital One share for each Discover share, representing a 26.6% premium over Discover’s closing price on Friday. If concluded, Capital One shareholders will own 60% of the combined company, with Discover shareholders owning the rest. The companies expect to achieve $2.7 billion in pre-tax synergies in 2027, including cost-cutting and network savings.
Regulatory Scrutiny and Market Impact
The deal is expected to face regulatory approval in late 2024 or early 2025. However, it comes at a time when the Biden administration has focused on boosting competition in all areas of the economy, potentially leading to heightened regulatory scrutiny. Democratic progressives have long fought bank consolidation, and the Biden administration’s executive order has further emphasized the need to review bank merger policies.
Anticipated Challenges and Supervisory Issues
The acquisition is likely to provoke a Justice Department investigation due to the companies’ positions in the credit card issuer market and potential barriers to entry for new entrants. Discover Financial Services has faced some regulatory challenges in the past, but supervisory issues are generally less of an obstacle when the problems are with the target company and the acquirer is considered a good actor.
Financial Performance and Market Trends
In the fourth quarter, both Discover and Capital One reported profit falls, reflecting increasing provisions for losses from bad loans as rising interest rates raise the risk of consumer defaults on credit card debt and mortgages. This trend in the financial sector adds another layer of complexity to the proposed acquisition.
