Capital One to Buy Discover Financial in $35 Billion Deal

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(Bloomberg) — Capital One Financial Corp. agreed to buy Discover Financial Services in a $35 billion all-stock deal to create the largest US credit card company by loan volume, giving the combined entity a stronger foothold to compete with Wall Street’s behemoths.

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McLean, Virginia-based Capital One will pay 1.0192 of its own shares for each Discover share, a 26.6% premium to the closing price on Feb. 16, according to a statement. The transaction, first reported by Bloomberg News, is expected to complete in late 2024 or early 2025, pending regulatory and shareholder approvals of both firms.

The purchase of Discover ranks as the biggest merger globally this year, surpassing Synopsys Inc.’s roughly $34 billion acquisition of software developer Ansys Inc. announced in January. The deal brings together two storied consumer-finance brands, a combination that will surpass longtime rivals JPMorgan Chase & Co. and Citigroup Inc. by US credit-card loan volume, according to data compiled by Bloomberg Intelligence.

It’s a “singular opportunity” to bring together two companies that can compete with the largest payment networks, said Capital One Chief Executive Officer Richard Fairbank in the statement.

Capital One holders will own about 60% of the combined company and Discover holders the remainder, according to the statement. The acquisition will generate pre-tax synergies of $2.7 billion.

“The main rationale is the fixed costs of technology that result in bigger being better,” said Jay Ritter, finance professor at the University of Florida. “This fact has been reshaping many industries for many years, and I see no reason to think that the trend towards fewer, but larger, firms will end.”

Prime Customers

Capital One is known for its commercials featuring celebrities like Jennifer Garner and Samuel L. Jackson asking, “What’s in your wallet?” The company, led by 73-year-old CEO Fairbank, has historically catered to subprime consumers who carry a balance on their cards each month.

Fairbank said on an earnings call in January that delinquencies had stabilized after reporting net charge offs that were higher than analysts expected as borrowers fell behind on their credit-card and auto loans.

In recent years, Capital One has been trying to attract more premium customers that tend to be heavy-spending and more loyal. It agreed to buy the digital concierge service Velocity Black last year, pushing deeper into luxury markets dominated by firms such as American Express Co. and JPMorgan.

Discover has long focused on prime customers with better credit ratings, though it has historically shied away from the flashy sign-on bonuses and lavish perks used by many of its rivals.

Discover said in January that its fourth-quarter profit dropped 62% as it continued to grapple with the fallout. The company halted buybacks last year and has been seeking a buyer for its student-loan business. In December, Discover appointed Toronto-Dominion Bank’s Michael Rhodes as its new CEO, lining him up to take over by early March.

“Credit card companies have large fixed costs for information technology, partly for algorithms aimed at fraud prevention, so bigger is better,” said Ritter.

–With assistance from Ambereen Choudhury and Jenny Surane.

(Adds comment in fourth and sixth paragraphs.)

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