US lender Capital One has agreed to pay $35.3 billion to acquire rival Discover Financial. This all-stock deal will combine the two biggest credit card companies in the country.
The stock of its smaller rival, Discover, is now valued by Capital One at a premium of 27% over Friday’s closing price. Discover shareholders would receive 1.0192 Capital One shares for each share they owned under the terms of the agreement.
The founder and CEO of Capital One, Richard Fairbank, stated, “With this combination, we’re creating a company that is exceptionally well-positioned to create significant value for consumers, small businesses, merchants, and shareholders as technology continues to transform the payments and banking marketplace.”
One of the largest transactions in the credit card sector since the 2008 financial crisis, the merger of Illinois-based Discover and Virginia-based Capital One would upend the US credit card market.
After JPMorgan Chase and Citigroup, Capital One and Discover are two of the largest credit card issuers. As a rival to Visa and Mastercard, Discover also provides a payment network.
The last significant bank merger took place nearly five years ago when regional lender BB&T formed Truist by purchasing SunTrust for roughly $28 billion in a $66 billion deal.
Although it has long been anticipated that the highly fragmented US banking industry would consolidate, a number of significant players have found it difficult to integrate and realize the synergies that are anticipated when two competitors merge.
According to statements made on Monday by Capital One and Discover, the deal is anticipated to produce $1.5 billion in cost synergies and yield a 16 percent return on invested capital by 2027.
The possible transaction is being considered at a time when US regulators are preparing to change the laws governing bank mergers in an effort to improve openness and raise the bar for transactions.
Given the size of the credit card businesses of the two companies, US antitrust regulators are likely to scrutinize a Capital One acquisition of Discover closely.
The deal is expected to close by late 2024 or early 2025, according to the companies.
Megadeals have resumed in recent months as chief executives gain more confidence in their ability to close deals, following a weak year for dealmaking in 2023 that was partially caused by stricter antitrust enforcement and high interest rates.
In the last few months, chip design toolmaker Synopsys announced the acquisition of engineering software maker Ansys for $35 billion, ExxonMobil agreed to buy shale group Pioneer Natural Resources for $60 billion, and Chevron reached an agreement to purchase Hess for $53 billion.
Capital One, the 12th-biggest US bank by assets, is well-known in the country for its “What’s in your wallet?” advertising slogan, which is proclaimed by celebrities like Samuel L. Jackson and Jennifer Garner.
It was one of many lenders that felt the heat after Silicon Valley Bank failed in March of last year.
Since then, Capital One’s stock has increased, partly due to Berkshire Hathaway, led by Warren Buffett, purchasing a nearly $1 billion stake.
Discover declared in December that, months after the abrupt exit of its previous CEO Roger Hochschild, it had named Michael Rhodes, a former TD Bank executive, as its new CEO.
Following government stimulus programs during the Covid-19 pandemic, credit card lenders saw extremely low delinquency rates; however, they have cautioned that consumers are gradually depleting much of their excess savings.
