In a significant move within the US financial sector, Capital One announced its plan on Monday to acquire Discover Financial Services in a monumental all-stock deal valued at $35.3 billion. This merger is set to unite two of the foremost credit card issuers in the United States to create a formidable payment network capable of competing with leading entities such as Visa, Mastercard, and American Express.
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Under the terms of the agreement, Discover shareholders are poised to receive 1.0192 shares of Capital One for each share they hold, translating to a 26.6% premium over Discover’s closing stock price on the preceding Friday. Post-merger, Capital One, and Discover shareholders will hold 60% and 40% stakes in the new entity.
According to the New York Post, according to industry analyst Nilson, Capital One, with a market valuation of $52.2 billion, ranks as the fourth-largest credit card issuer in the US by volume as of 2022. Discover holds the sixth position, showcasing both companies’ significant market presence. The transaction will receive regulatory approval by late 2024 or early 2025.
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However, it is expected to undergo rigorous scrutiny under the administration of President Joe Biden, which has been actively seeking to enhance competition across various economic sectors. This includes a specific focus on banking mergers, highlighted by a 2021 executive order.
This merger comes against increased regulatory attention on bank consolidations, which critics argue pose systemic risks and potentially harm consumers by reducing lending options. The deal also arrives amidst heightened scrutiny on credit card fees, with the Consumer Financial Protection Bureau (CFPB) proposing strict new regulations and expressing concerns over competition within the credit card market.
Discover, and Capital One reported significant declines in profit for the fourth quarter, attributing the downturn to rising provisions for loan losses amid escalating interest rates, which heighten the risk of consumer defaults on credit card debt and mortgages. Discover, in particular, has faced regulatory challenges, including a review of misclassified credit card accounts and a consent order with the Federal Deposit Insurance Corp to enhance its consumer compliance practices.
Customers also questioned the new merger and asked if they would be expecting higher interest rates since the acquisition will be taking place later in the year:
Despite these challenges, the merger represents a strategic move to bolster the combined company’s position in the competitive payments industry, leveraging Discover’s role as one of the four major US credit card processors. If successful, the merger will create the sixth-largest bank in the United States, according to Federal Reserve data, marking a significant reshaping of the financial landscape.