Capital One will buy Discover for $35 billion in the largest transaction of the year

Capital One will buy Discover for $35 billion in the largest transaction of the year

Capital One Financial Corp. has agreed to purchase Discover Financial Services in a $35 billion deal that will create the largest US credit card company by loan volume, which will give the combined entity a stronger foothold to compete with Wall Street giants.

Capital One will pay 1.0192 of its own shares for each Discover share, representing a 26.6% premium over the closing price on February 16, the McLean, Virginia-based company said in a statement. The transaction, which was first reported by Bloomberg News, is expected to be completed in late 2024 or early 2025, pending regulatory and shareholder approvals for both companies.

The Discover purchase is the largest global merger this year, surpassing Synopsys Inc.’s roughly $34 billion acquisition of software developer Ansys Inc. announced in January. This is the union of two major consumer finance brands, a combination that will surpass rivals JPMorgan Chase & Co. and Citigroup Inc. in credit card loan volume in the US, according to data compiled by Bloomberg Intelligence. . The deal will also give Capital One a foothold in the world of payment networks.

This is a “unique opportunity” to unite two companies that can compete with the largest payment networksCapital One CEO Richard Fairbank said in the statement.

Discover Stock They rose more than 12% in Tuesday trading in New York. Capital One fell less than 1% at 10:07 in the morning.

According to the statement, Capital One shareholders will own about 60% of the combined company and Discover shareholders the rest. The acquisition will generate pre-tax synergies of US$2.7 billion

“The main reason is the fixed costs of technology, where bigger is better,” says Jay Ritter, a finance professor at the University of Florida. “This fact has been reshaping many industries for many years, and I see no reason to think that the trend toward fewer, larger companies is going to end.”

The combined size of the company is likely attract scrutiny from antitrust regulatorsanalysts said on Tuesday.

“Progressives will tell you this would hurt competition,” said Ian Katz of Capital Alpha Partners. “In fact, they already have. But if they rejected the deal they would be accused of protecting Visa and Mastercard, what is often called a duopoly.” Katz said he is slightly inclined to think the deal will pass, “but not before the November elections.”

Historically, Capital One has had to rely on Visa Inc. or Mastercard Inc.. to issue your credit cards. With Discover in your hands, The company could eliminate these two intermediaries and have more control over the prices charged to merchants. every time a consumer passes one of the firm’s cards at checkout.

Capital One is known for its ads featuring celebrities like Taylor Swift, Jennifer Garner and Samuel L. Jackson asking, “What’s in your purse?” The company, led by 73-year-old CEO Fairbank, has historically targeted high-risk consumers who carry credit on their cards each month.

Fairbank said in an earnings call in January that delinquencies had stabilized after reporting the net cancellations that were higher than analysts expecteds, as borrowers fell behind on their credit cards and auto loans.

In recent years, Capital One has tried to attract more premium customers who tend to spend more and be more loyal. Last year it agreed to purchase digital concierge service Velocity Blackentering luxury markets dominated by firms such as American Express Co. and JPMorgan.

Discover has three different payment networks: Discover Network, Diners Club International and its Pulse debit network. The company has been trying to expand acceptance and use of its offerings for years, although it has long lagged behind Visa and Mastercard.

According to Dan Dolev of Mizuho Securities USA, Capital One is the third largest issuer of Visa and Mastercard credit cards in the US. and represents approximately 10% of credit card spending in that country.

“The combination could be more competitive for Visa/Mastercard,” RBC Capital Markets analyst Daniel Perlin said in a note to clients. “At a high level, the risk to networks is simple: “Can Capital One monetize Discover’s network capabilities, which historically haven’t gained much market share against networks?”

Discover reported in January that its fourth-quarter profits fell 62% as the company continued to deal with the fallout from compliance and risk management failures. The company stopped buybacks last year and has been looking for a buyer for its student loan business. In December, Discover appointed Toronto-Dominion Bank’s Michael Rhodes as its new CEO, with a view to him assuming the role in early March.

Credit card companies have large fixed IT costspartly for algorithms aimed at fraud prevention, so bigger is better,” Ritter said.