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Image Source: The Wall Street Journal
In a significant move within the financial sector, Capital One has officially revealed plans to acquire Discover Financial for a substantial USD 35.3 billion. This strategic all-stock merger is set to bring together two major players in the American credit card arena, reshaping the industry landscape. The deal values Discover’s stock at 27% above its Friday closing price, with Discover shareholders slated to receive 1.0192 Capital One shares for each of theirs.
Richard Fairbank, the founder and CEO of Capital One, expressed optimism about the combined entity, stating, “Through 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.”
The merger of Virginia-based Capital One and Illinois-based Discover is expected to be one of the largest deals in the credit card sector since the 2008 financial crisis. Both companies, among the prominent credit card lenders, trail behind industry giants JPMorgan Chase and Citigroup. Additionally, Discover’s payment network puts it in direct competition with major players like Visa and Mastercard.
The financial landscape has seen limited mergers in recent years, with the last significant bank merger occurring almost five years ago when BB&T acquired SunTrust for around USD 28 billion in a USD 66 billion deal. Capital One and Discover anticipate generating expense synergies of USD 1.5 billion in 2027, with a projected return on invested capital of 16% in the same year.
This proposed deal is anticipated to face scrutiny from U.S. antitrust regulators, considering the substantial size of both companies’ credit card businesses. The companies have outlined their expectations for the deal to close by late 2024 or early 2025.
This development comes amid broader regulatory reforms in the banking sector, aiming to enhance transparency and scrutiny of mergers. Despite a sluggish year for dealmaking in 2023, recent months have witnessed a resurgence in megadeals, reflecting increased confidence among chief executives in completing transactions. Notable deals include ExxonMobil’s acquisition of Pioneer Natural Resources for USD 60 billion, Chevron’s purchase of Hess for USD 53 billion, and Synopsys’ takeover of Ansys for USD 35 billion.
Capital One, recognized for its iconic “What’s in your wallet?” advertising slogan, currently stands as the 12th-largest U.S. bank by assets. The acquisition decision follows a recovery in Capital One’s stock, partly attributed to Berkshire Hathaway’s significant investment.
Discover, on the other hand, recently appointed Michael Rhodes as its CEO, following the departure of former CEO Roger Hochschild. While credit card lenders experienced low delinquency rates during government stimulus programs amid the Covid-19 pandemic, concerns have been raised about consumers gradually depleting their excess savings.
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