Capital One to acquire Discover Financial Services in $35.3 billion deal

Warren Buffett-backed leading United States consumer lender Capital One on February 19 said it plans to acquire credit card issuer Discover Financial Services in an all-stock deal valued at $35.3 billion, as per a Reuters report.

The merger, uniting two of the largest US credit card companies, aims to establish "a payments network that can compete with the largest payments networks and payments companies," as stated by Richard Fairbank, Chairman and CEO of Capital One.

The consolidation positions Capital One alongside other major US-based payments networks such as Visa, Mastercard, and American Express.

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Details of the Deal

Discover shareholders are set to receive 1.0192 Capital One shares for each Discover share, presenting a 26.6 percent premium over Discover's closing price on Friday.

Upon completion, Capital One shareholders will hold a 60 percent stake in the combined company, with Discover shareholders retaining approximately 40 percent, according to the official statement.

As of 2022, Capital One, valued at $52.2 billion, ranks as the fourth-largest player in the US credit card market by volume, according to Nilson. Discover holds the sixth position in the market.

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Regulatory Landscape and Democratic Pressure

The acquisition is anticipated to gain regulatory approval in late 2024 or early 2025, according to Capital One.

The transaction is expected to undergo thorough scrutiny, particularly as US President Joe Biden's administration remains committed to enhancing competition across various sectors, including banking, the report added. The administration's focus on bank deals was emphasized in a 2021 executive order.

Jeremy Kress, a business law professor at the University of Michigan and a former Federal Reserve bank merger oversight expert, told Reuters they expect significant push-back and heightened regulatory scrutiny for this deal.

Democratic progressives have historically opposed bank consolidation, contending that it heightens systemic risk and harms consumers by limiting lending. Recent pressures on regulators to adopt a more stringent stance on such deals intensified following transactions aimed at rescuing failed lenders, such as JPMorgan's acquisition of First Republic Bank.

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Discover and Capital One Assets

According to December Federal Reserve data, Discover ranked as the 27th largest US bank with nearly $150 billion in assets, while Capital One held the ninth position with $476 billion in assets. Upon completion of the merger, the combined entity is poised to become the sixth-largest U.S. bank, as indicated by Fed data.

While both companies share some credit card business areas, Discover is one of the major credit card processors in the US. The deal coincides with an increased regulatory focus on credit card fees, subject to new rules proposed by the Consumer Financial Protection Bureau (CFPB).

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CFPB's Concerns and Discover's Regulatory Challenges

The CFPB, led by merger sceptic Rohit Chopra, expressed competition concerns in the US credit card market, citing a report that highlighted cheaper interest rates offered by small banks and credit unions during the first half of 2023.

Discover, facing regulatory challenges, disclosed a review over incorrectly classified credit card accounts from mid-2007 and agreed to enhance consumer compliance as part of a consent order with the Federal Deposit Insurance Corp in October.

Both Discover and Capital One reported declines in fourth-quarter profits, with Discover experiencing a 62 percent fall and Capital One a 43 percent decline.

Regulatory challenges, including supervisory issues, are typically obstacles for deals between financial firms, but regulators may be more receptive when issues lie with the target company and the acquiring entity has a positive regulatory track record, legal experts told Reuters.

(With inputs from Reuters)