Capital One to buy Discover Financial in $35.3 billion all-stock deal

By Anirban Sen and Michelle Price

NEW YORK/WASHINGTON (Reuters) -Warren Buffett-backed U.S. consumer bank Capital One plans to acquire U.S. credit card issuer Discover Financial Services in an all-stock transaction valued at $35.3 billion to create a global payments giant, the companies said on Monday. The deal, which is expected to receive intense antitrust scrutiny, would form the sixth-largest U.S. bank by assets and a U.S. credit card behemoth that would compete with rivals JPMorgan Chase and Citigroup.

While Discover has a network that spans 200 countries and territories, it is still much smaller than rivals Visa, Mastercard and American Express.

“This acquisition adds scale and investment, enabling the Discover network to be more competitive with the largest payments networks,” the companies said in a statement.

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, while Discover shareholders will own the rest.

A Capital One/Discover combination would have “significant strategic merit,” Baird equity research analysts said in a note to clients, citing the potential for cutting costs that comes with greater scale, and the benefits of having Capital One credit cards utilize Discover’s network.

The companies said they expect to achieve $2.7 billion in pre-tax synergies in 2027 that would include cost-cutting and network savings.

Capital One, which counts Buffet’s Berkshire Hathaway as its seventh-largest shareholder with a 3.28% stake, is valued at $52.2 billion. It was the fourth largest player in the U.S. credit card market by volume in 2022 while Discover was the sixth, according to Nilson.

The new board will have three members appointed by Discover. It was not immediately clear how many directors the board would have.


The deal is expected to be approved by regulators in late 2024 or early 2025, Capital One said.

But it comes at a time when Democratic President Joe Biden’s administration has focused on boosting competition in all areas of the economy, including a 2021 executive order aimed at bank deals, merger experts said.

“I predict that this deal…will provoke a significant push-back and receive heightened regulatory scrutiny,” Jeremy Kress, a University of Michigan professor of business law who previously worked on bank merger oversight at the Federal Reserve, wrote in an email.

“It will be the first big test of bank merger regulation since the Biden administration’s executive order on promoting competition in 2021.”

Democratic progressives have long fought bank consolidation, arguing it increases systemic risk and hurts consumers by reducing lending. The pressure intensified following deals aimed at rescuing failed lenders last year, including JPMorgan’s purchase of First Republic Bank.

The Biden administration’s executive order required bank regulators and the Justice Department to review their bank merger policies. The DOJ subsequently said it would consider a broader range of factors when assessing bank mergers for antitrust issues, while the Office of the Comptroller of the Currency last month proposed scrapping its fast-track review process.

The deal also would come at a time of increased regulatory focus on credit card fees, which are the subject of strict new rules proposed by the Consumer Financial Protection Bureau.

That agency, led by merger skeptic Rohit Chopra, who has a say in bank deals, has flagged competition concerns in the U.S. credit card market, including higher rates charged by the biggest credit card providers.

“This would almost certainly provoke a Justice Department investigation,” said Seattle University School law professor John Kirkwood.

He added that a probe would likely focus on the companies’ positions in the credit card issuer market and how that affects competition as well as potential barriers to entry for new entrants to the market.


In late 2023, Discover said it was exploring the sale of its student loan business and would stop accepting new student loan applications in February.

The company, led by TD Bank Group veteran Michael Rhodes, has faced some regulatory challenges. It disclosed in July a regulatory review over some incorrectly classified credit card accounts from mid-2007.

In October, Discover said it agreed to improve its consumer compliance and related corporate governance as part of a consent order with the Federal Deposit Insurance Corp.

While supervisory issues are generally an obstacle for deals between financial firms, regulators are more amenable when the problems are with the target company and the acquirer is considered a good actor, according to legal experts.

In the fourth quarter, Discover and Capital One reported 62% and 43% profit falls respectively. Banks have increased provisions for losses from bad loans as rising interest rates raise the risk of consumer defaults on credit card debt and mortgages.

(Reporting by Anirban Sen and Michelle Price; Additional reporting by Maria Ponnezhath, Juveria Tabassum, Chris Sanders and Kane Wu; Writing by Carolina Mandl; Editing by Stephen Coates, Michael Perry and Edwina Gibbs)


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