Capital One, a U.S. consumer bank supported by Warren Buffett, is set to acquire Discover Financial Services in an all-stock deal valued at $35.3 billion. This move marks a strategic expansion for one of the country’s leading credit card issuers, creating a global payments powerhouse. Under the terms of the deal, Discover shareholders will receive 1.0192 Capital One shares for each of their existing units. At closing, Capital One shareholders will own 60% of the combined company, and Discover shareholders will own 40%.
The companies said the merger would accelerate their plans to improve technology and expand their payment networks. The combined company will be “in a position to compete with the largest payments networks and payments companies” while increasing the scale of its global operations, CEO Richard Fairbank said in a statement. “We expect to realize significant cost synergies over $2 billion by 2027,” the company said.
By acquiring Discover, Capital One is set to become the sixth-largest U.S. bank by assets, based on December Federal Reserve data. It is also expected to become the second-largest card issuer by debt outstanding, behind JPMorgan Chase & Co, opening a new tab, and Citigroup. The companies said the merger is expected to close in late 2024 or early 2025.
The deal is likely to face intense antitrust scrutiny. It is one of the largest deals announced this year, along with Synopsys’ deal to buy privately held semiconductor firm Ansys for $35 billion. The acquisitions come at a time when banks are facing rising provisions for loan losses.
Both companies are adjusting to regulatory pressures, with Discover facing several investigations over its marketing practices and compliance management. That may have weighed on the company’s ability to raise money in the stock market, prompting it to seek strategic alternatives.
As for the merger, analysts said it was expected to boost Capital One’s earnings per share by a substantial amount. Piper Sandler analyst Kevin Barker said the combination will allow the company to compete better with rivals like JPMorgan, which has a more extensive portfolio of cards. He added that the acquisition is also expected to help it gain more customers and revenue from its prepaid offerings.
NerdWallet’s John Hecht said the deal could be good news for credit card rewards programs. He said the merged company will have more spending power and can offer bigger bonuses to consumers. However, he also pointed out that the companies will need regulators to approve the deal and accept that some benefits might be cut back during the integration process.
Ultimately, the deal makes sense because Discover offers many valuable benefits for its consumers, Hecht said. He said the company has built a large customer base by offering loyalty programs and cash-back rewards on everyday purchases.
