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

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From Reuters

NEW YORK/WASHINGTON — Capital One, the U.S. consumer finance company backed by Warren Buffett, said Monday it will acquire credit card issuer Discover Financial Services in an all-stock deal worth $35.3 billion.

The partnership, which combines two of the largest U.S. credit card companies, is aimed at creating “a payments network that can compete with the largest payment networks and payment companies,” said Capital One chairman and chief executive officer. said Richard Fairbank, CEO. statement.

Visa, Mastercard, American Express, etc. are payment networks based in the United States.

Discover shareholders will receive 1.0192 Capital One shares for each Discover share. This represents a 26.6% premium over Discover's Friday closing price.

Upon closing, Capital One shareholders will own 60% of the combined company's stock, and Discover shareholders will own approximately 40%, according to the statement.

Nilsson said Capital One, with a market capitalization of $52.2 billion, is the fourth-largest credit card company in the U.S. by sales value as of 2022, while Discover is sixth-largest.

More advanced monitoring

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

The deal is likely to come under increased scrutiny as the administration of Democratic President Joe Biden remains focused on promoting competition in all sectors of the economy, including a 2021 executive order targeting banking transactions.

“If this deal were to go through, it would cause significant backlash and intense regulatory scrutiny,” said Jeremy, a University of Michigan commercial law professor who previously worked at the Federal Reserve overseeing bank mergers. Mr. Kress writes: Email to Reuters.

“This is the first major test of bank merger regulation since the Biden administration’s 2021 Promotion of Competition Executive Order.”

Progressives in the Democratic Party have long opposed bank consolidation, arguing that it increases systemic risk and hurts consumers by cutting lending, and has urged regulators to be tougher on the deals. The pressure is increasing to take a stance.

The pressure intensified following deals last year aimed at bailing out failed lenders, including JPMorgan JPM.N's acquisition of First Republic Bank.

The Biden administration's executive order called on banking regulators and the Department of Justice to review bank merger policies.

The Justice Department subsequently announced it would consider a broader range of factors when evaluating bank mergers for antitrust issues, while the Office of the Comptroller of the Currency last month proposed eliminating the fast-track review process.

By assets, Discover ranked 27th in the U.S. with about $150 billion in assets, while Capital One ranked ninth in the U.S. with $476 billion in assets, according to December Federal Reserve data rankings of insured U.S. banks. .

The combined entity will be the sixth-largest bank in the United States, according to Federal Reserve data.

Although the two companies overlap in some areas of their credit card businesses, Discover is one of the four largest credit card processors in the U.S., along with Visa, Mastercard, and American Express, making fees potentially valuable to Capital One. It facilitates credit card payments.

The deal also comes 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.

The agency, led by merger skeptic and banking voice Rohit Chopra, last week warned of competition concerns in the U.S. credit card market.

The report found that in the first half of 2023, small banks and credit unions are likely to offer lower interest rates than the 25 largest credit card companies across all credit score tiers.

The CFPB's previous report also found that the top 10 companies by average credit card loan balance accounted for 83% of credit card loans in 2022, continuing to decline from 87% in 2016.

supervisory issues

Discover is considering selling its student loan business in the second half of 2023, and announced in February that it would stop accepting new student loan applications.

The company, led by TD Bank Group veteran Michael Rose, faces several regulatory challenges.

In July, the company disclosed a regulatory investigation into some credit card accounts that were misclassified since mid-2007.

Discover announced in October that it had agreed to consumer compliance and related corporate governance improvements as part of a consent order with the Federal Deposit Insurance Corporation.

Legal experts say that while supervisory issues are typically an obstacle for transactions between financial companies, regulators' response can be significant if the target company is in trouble and the acquirer is seen as a bona fide entity. becomes more flexible.

Discover and Capital One saw their fourth-quarter profits fall 62% and 43%, respectively, as rising interest rates increased the risk of default on consumer credit card debt and mortgages and banks increased provisions for losses on bad loans. reported a decrease of %.