The stock markets got a jolt on Tuesday after Capital One Financial (NYSE:COF), one among the most important banks within the country, announced that it has agreed to purchase Discover Financial (NYSE:DFS), one among just 4 major payment-processing firms. Valued at $35 billion, it’s the largest deal to hit the credit/debit card sector.
After all, the deal is subject to regulatory approvals, but when it does move forward, it could have a significant impact on the industry within the years ahead.
Discover’s stock price soared on the news, rising about 14% on Tuesday to $126 per share. Capital One was relatively flat on the day, holding at around $138 per share.
A singular opportunity
To grasp the impact of this potential deal, it helps to understand how these two firms are different and where they intersect.
Capital One is the ninth-largest bank within the country with about $476 billion in assets, however it is primarily often called one among the most important credit-card issuers within the nation. The majority of its revenue comes from bank cards, versus other forms of banking services. As an issuer, it’s a lender for bank cards on the networks of two major credit-card firms, Visa (NYSE:V) and Mastercard (NYSE:MA).
Discover can be a bank, albeit much smaller, with about $149 billion in assets. While it offers consumer-banking services, it makes most of its revenue as a credit-card issuer and processor. Discover is one among 4 major firms, together with Visa, Mastercard, and American Express (NYSE:AXP), that has its own credit-card network. Nonetheless, like American Express, Discover has a closed-loop network, meaning it issues the cards, lends the cash, processes the fees, and collects the interest and charges, all inside its own credit network.
This all-stock deal valued at $35.3 billion would lead to Capital One shareholders owning roughly 60% of the corporate and Discover shareholders owning about 40%.
“Our acquisition of Discover is a singular opportunity to bring together two very successful firms with complementary capabilities and franchises and to construct a payments network that may compete with the most important payments networks and payments firms,” said Richard Fairbank, founder, chairman and CEO of Capital One.
A lot of questions
In a video message released on Monday, Fairbank called Discover a “beneficial and rare asset” that accelerates Capital One’s “long journey to work directly with merchants.” He also said that it can “add scale” to Discover’s global network of 70 million merchant acceptance points in 200 countries.
While the synergies are actually there, it is just not entirely clear yet how these two firms will come together. It appears Capital One will proceed to issue cards in partnership with the Visa and Mastercard networks — along with bolstering the Discover network.
Based on Reuters, a Mastercard spokesperson said the partnership with Capital One is anticipated to “proceed for the long run.” Visa couldn’t be reached for comment by Reuters, and each firms recently re-upped their agreements with Capital One.
“It’s common for firms to be each competitors and customers of each other, and we don’t see this as a difficulty,” Fairbank added within the Reuters piece.
A giant deal
For each of those firms, the opportunities here seem abundant. The combined company would create the sixth-largest bank within the U.S. with greater than $625 billion in assets. As for Discover, the deal could possibly be transformative within the credit-card space. It’s currently a distant fourth place out of 4, but with Capital One’s added scale and reach, it could turn out to be a significant player. Each Mastercard and Visa stocks traded lower on Tuesday.
The combined company can be expected to generate $1.5 billion in expense synergies in 2027 and $1.2 billion in network synergies in that very same 12 months. Further, it’s anticipated to be greater than 15% accretive to adjusted earnings per share in 2027.
The businesses are confident in getting the mandatory approvals and anticipate a late-2024 or early-2025 closing. That’s actually not a slam dunk, as many analysts say the deal should face intense scrutiny from regulators, who’re concerned with large bank mergers normally in addition to antitrust issues.
There continues to be an extended strategy to go for this to turn out to be a reality, and lots of questions must still be answered. Nonetheless, the initial takeaway is that this could possibly be an enormous deal — in additional ways than one. Definitely stay tuned.