By Shaim Akhtar
Staff Writer
Capital One recently announced its plan to merge with Discover Financial Services in late 2024 or early 2025, valuing the deal at over $35 billion.
Following the announcement, Capital One released a statement to investors that provided further insight into the deal, including the projected revenue of $2.7 billion and the aim to reach more than 100 million customers worldwide following the acquisition.
In addition to Capital One's current shareholders, the financial firm also provided details to shareholders of Discover by offering to exchange each Discover share for 1.0192 Capital One shares, representing a premium of 26.6% based on current share prices, according to the statement.
Through the acquisition, Discover and Capital One would gain greater access to a credit card network estimated to encompass 300 million users combined from both corporations, according to the New York Times.
According to Investopedia, both banking firms combined would also have the potential to become the United States' largest creditor by accumulating loans exceeding $267 billion, compared to the current largest creditor, JP Morgan, with $211 billion.
The merger would also enable both financial institutions to enhance their independence from the two major payment services, Visa and Mastercard, by leveraging Discover's extensive payment network.
The increased independence would potentially lead to the generation of an additional $1.2 billion in revenues. However, if the proposition fails due to regulatory policies or financial disagreements, either company will be required to pay a termination fee of $1.38 billion, according to Reuters.
Although Discover has not yet disclosed the details of the transition process to their current consumers, the Los Angeles Times speculates that Capital One might issue new cards to Discover’s cardholders, instead highlighting Capital One’s logo on the new card.
The massive merger between the banks still needs to go through the process of obtaining approval from government regulators in order to pass the deal. In a statement to CNET, financial analyst Aaron Hurd, however, believes that approval from government regulators is likely because under the Biden administration, federal regulators’ “appetites for bank mergers is shrinking.”
In terms of the effect on competition, Hurd also said that “the deal represents an immediate 27% return for Discover shareholders. In my view, [it] puts a combined company in a good position to compete for major co-branded deals against larger banks.”
Upon receiving the news, financial leaders at both banking firms reacted to the Capital One-Discover merger.
“Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchise, and to build a payments network that can compete with the largest payments networks and payments companies,” said Richard Fairbank, founder and CEO of Capital One.
Additionally, Discover President and CEO Michael Rhodes commented, “The transaction with Capital One brings together two strong brands with enhanced ability to accelerate growth and maximizes value for our shareholders, enabling them to participate in the tremendous upside of the combined company.”
While there is still a long path until the deal comes through, there is no doubt that a merger between Capital One and Discover Financial Services would have significant ripples in the banking industry.
