Capital One Financial's (NYSE: COF) planned acquisition of Discover Financial Services (NYSE: DFS) has received regulatory approval, and investors are breathing a sigh of relief.
Shares of Discover opened up 7% and Capital One up 5%, before retreating with the broader market to up 2% and 1% as of 11:30 a.m. ET. MasterCard (NYSE: MA) and Visa (NYSE: V) were headed in the other direction, both down about 3% midday.
A credit card powerhouse
Capital One and Discover are two of the biggest names in credit cards. The two announced their intention to join forces in early 2024 to create a new financial services powerhouse, but investors worried antitrust regulators might get in the way.
Those fears proved to be unwarranted. Late Friday, the Office of the Comptroller of the Currency announced it has approved the planned $35 billion merger on the condition that Discover follow through on the terms of a consent order and pay a fine related to some alleged overcharging in past years.
According to the regulator, the combination would be the eighth largest U.S. depository organization with consolidated assets of about $640 billion. The merger is expected to close by the end of May.
Is now the time to buy credit card stocks?
With the merger cleared it seems likely Discover shares will soon be off the market, but Capital One might be an intriguing option for investors looking for bank stocks. The deal provides Capital One with a massive customer list and its own network, potentially lessening its dependence on MasterCard and Visa over time.
That said, those buying in should brace for potential turbulence. Visa and Mastercard are down today, and Discover and Capital One have given back much of their gains, because of concerns about the health of the U.S. economy. The threat of a recession would likely slow credit card spending and raise defaults, which would hit into earnings at all three of these companies.
The Capital One/Discover merger could be a big success over time, but no amount of dealmaking can insulate this sector if the economy does turn south.
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Discover Financial Services is an advertising partner of Motley Fool Money. Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.
