Capital One Acquires Discover, Reshapes U.S. Credit Card Industry

After almost 15 months of announcing an agreement to acquire Discover Financial Services, Capital One COF has finalized the takeover. The $35-billion transaction reshapes the landscape of the credit card industry, creating a behemoth (in terms of loan volume).

With the deal completion, Capital One is well-placed to capture a bigger share of spending on cards and compete with well-known card issuers – Visa V and Mastercard MA. Further, the company now has control of Discover’s payments network—one of only four in the United States. This will enable it to generate greater revenues from interchange fees and offer independence from the Visa-Mastercard duopoly.

The path to completion was far from smooth. While Capital One and Discover shareholders approved the transaction in February, the deal underwent extensive regulatory scrutiny. Final approval came last month from the Federal Reserve and the Office of the Comptroller of the Currency, after the U.S. Department of Justice opted not to challenge the merger.

However, the green light came with conditions: Capital One must address outstanding enforcement issues tied to Discover. In 2023, Discover revealed that it had overcharged merchants on certain credit card transactions since 2007—a disclosure that drew regulatory attention and required corrective action.

Capital One’s acquisition of Discover signals a new era in consumer finance, potentially reshaping competition and innovation across the credit card and payments landscape.

Details on Capital One-Discover Merger

Under the terms of the agreement, Discover shareholders received 1.0192 Capital One shares for each Discover share. Also, three members from Discover’s board of directors – Thomas G. Maheras, Michael Shepherd and Jennifer L. Wong – have joined Capital One.

At the time of the announcement (February 2024), it was noted that the Capital One-Discover merger will likely generate and deliver attractive accretion and returns for shareholders. Expense synergies of $1.5 billion in 2027, coupled with network synergies of $1.2 billion, underscore the value-creation potential of the merger. The transaction will result in a more than 15% accretion to adjusted non-GAAP EPS by 2027.

The transaction will also bolster Capital One's balance sheet. On a pro forma basis, the combined entity would have a CET1 ratio of roughly 14% at closing.

Parting Thoughts on Capital One-Discover Deal

At present, there will be no change to the Capital One and Discover customer accounts and banking relationships. All the customers will be provided with comprehensive information in advance of any changes. Additionally, Capital One plans to continue to offer Discover credit card products as Discover-branded cards as well as the other consumer cards currently offered by Capital One. 

Capital One's "Digital First" banking model, characterized by its iconic customer experience and fee-free offerings, will be bolstered by Discover Financial's national direct savings bank. This synergy will increase the combined company's ability to compete with the nation's largest banks while accelerating national banking growth.

Over the years, COF has pursued a strategic acquisition strategy to diversify its offerings and expand its market presence. Some of the notable ones are ING Direct USA, HSBC's U.S. Credit Card Portfolio and TripleTree. These acquisitions have been instrumental in transforming the company from a monoline credit card issuer into a diversified financial services firm with a significant presence in retail banking, commercial lending and digital banking platforms.

Over the past year, shares of Capital One have rallied 40.3%, outperforming the industry’s growth of 39%.
 

At present, COF carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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