Warren Buffett-backed US consumer bank Capital One plans to acquire US credit card company Discover Financial Services for $35.3 billion to create a global payments giant.
The deal, which is expected to come under intense scrutiny by competition authorities, would create the sixth-largest U.S. bank by assets and a U.S. credit card giant that would compete with rivals JPMorgan Chase and Citigroup.
Although Discover has a network that spans 200 countries and territories, it is still much smaller than rivals Visa, Mastercard and American Express.
It also brings together two companies whose customers are largely similar: often Americans looking for cash back or modest travel rewards, compared to the premium credit cards dominated by AmEx, Citi and Chase.
“This acquisition adds scale and investment that will make the Discover network more competitive with the largest payment networks,” the companies said in a statement.
Capital One will buy Discover for $35 billion in a deal that brings together two of the nation’s credit card companies.
Although Discover has a network covering 200 countries and territories, it is still much smaller than rivals Visa, Mastercard and American Express
Discover shareholders will receive 1.0192 Capital One shares for each Discover share, which represents a 26.6 percent premium to Discover’s closing price on Friday.
If the acquisition goes through, Capital One shareholders will own 60 percent of the combined company, while Discover shareholders will own the rest.
A Capital One/Discover combination would have “significant strategic merit,” Baird equity research analysts said in a note to clients, citing the potential for cost savings that come with greater scale and the benefits of using Capital One credit cards through the Discover network.
Capital One is the nation’s ninth largest bank by total assets, with 259 physical branch locations, 55 “Capital One Cafés” nationwide and a major online banking operation.
Discover Financial is a primarily online bank with one physical branch in Delaware.
“This market, which is dominated by the big players, is now going to shrink a little bit more,” said Matt Schulz, chief credit card analyst at LendingTree.
It will also give Discover’s payments network a major credit card partner, in a way that could make the payments network a major competitor again. The U.S. credit card industry is dominated by the Visa-Mastercard duopoly, with AmEx in third place and Discover in an even more distant fourth.
The companies said they expect to realize $2.7 billion in pre-tax synergies by 2027, including cost savings and network savings.
It will be the first major test of bank merger regulation since the Biden administration’s executive order on promoting competition in 2021.
Richard Fairbank is the founder and CEO of Capital One
Capital One, which counts Buffet’s Berkshire Hathaway as its seventh shareholder with a 3.28 percent stake, is valued at $52.2 billion.
It was the fourth largest player in the US credit card market by volume in 2022, while Discover was sixth, according to Nilson.
The new board will consist of three members appointed by Discover. It was not immediately clear how many directors the board would have.
It is unclear whether the deal will pass regulatory scrutiny. Almost every bank issues a credit card to customers, but few companies are credit card companies first and banks second.
Both Discover – long ago the Sears Card – and Capital One started as credit card companies that expanded into other financial offerings such as checking and savings accounts.
The deal is expected to be approved by regulators in late 2024 or early 2025, Capital One said.
But it comes at a time when Democratic President Joe Biden’s administration has focused on boosting competition in all areas of the economy, including a 2021 executive order targeting banking transactions, merger experts say.
“I predict that this deal … will trigger a significant backlash and increased regulatory scrutiny,” Jeremy Kress, a business law professor at the University of Michigan who previously worked on overseeing bank mergers at the Federal Reserve, wrote in a e-mail. .
“It will be the first major test of bank merger regulation since the Biden administration’s executive order on promoting competition in 2021.”
Democratic progressives have long fought against bank consolidation, arguing that it increases systemic risk and harms consumers by reducing lending.
Pressure mounted after deals last year aimed at rescuing failed lenders, including JPMorgan’s purchase of First Republic Bank.
The Biden administration’s executive order required banking regulators and the Justice Department to review their bank merger policies.
The DOJ subsequently said it would consider a broader range of factors when reviewing bank mergers for antitrust issues, while the Office of the Comptroller of the Monet last month proposed scrapping its expedited review process.
The deal would also come at a time of increasing regulatory focus on credit card fees, which are the subject of strict new rules proposed by the Consumer Financial Protection Bureau.
That agency, led by merger skeptic Rohit Chopra, which has a say in banking transactions, has identified competitive problems in the U.S. credit card market, including higher rates charged by the largest credit card providers.
“This would almost certainly trigger a Justice Department investigation,” said John Kirkwood, a law professor at Seattle University School.
He added that an investigation would likely focus on the companies’ positions in the credit card issuer market and how that affects competition, as well as potential barriers to entry for new entrants to the market.
In late 2023, Discover said it was exploring selling its student loan business and would stop accepting new student loan applications in February.
The company, led by TD Bank Group veteran Michael Rhodes, has faced some regulatory challenges. In July, the company announced a regulatory audit of a number of misclassified credit card accounts dating back to mid-2007.
In October, Discover said it agreed to improve consumer compliance and related corporate governance as part of a consent order with the Federal Deposit Insurance Corp.
While regulatory issues generally pose an obstacle to deals between financial companies, legal experts say regulators are more receptive when the problems lie with the target company and the acquirer is considered a good actor.
In the fourth quarter, Discover and Capital One reported earnings declines of 62 percent and 43 percent, respectively.
Banks have increased provisions for losses from bad loans as rising interest rates increase the risk that consumers will default on credit card debt and mortgages.