Capital One And Discover Merge In Largest Acquisition Of The Year

The largest acquisition of the year globally has been officially announced. On Monday, Capital One, a U.S. financial company, announced that it will acquire Discover Financial Services, a credit card lending institution, for $35 billion, through an all-stock transaction.

Capital One stated in a release that the company will pay 1.0192 of its own shares for each share of Discover, implying that the acquisition price per share will be a 26.6% premium to Discover's closing price last Friday. The transaction is expected to be completed by the end of 2024 or early 2025.

Last Friday, Capital One's stock price closed at $137.23 per share, and Discover's stock price closed at $110.49 per share.

According to the announcement, Capital One shareholders will own about 60% of the combined company's shares, and Discover shareholders will own about 40% of the shares.

The transaction will integrate two well-known consumer financial companies. Upon completion, it will create the largest credit card issuer by loan volume in the United States, possibly surpassing long-time competitors JP Morgan Chase and Citigroup Group.

According to data compiled by the media, Capital One's acquisition of Discover is the largest deal this year globally. To date, the largest transaction has been the approximately $34 billion acquisition of software developer Ansys by Synopsys, announced in January.

Based on S&P Global data, as of the third quarter of last year, Capital One was the 12th largest bank in the United States, with total assets of $471.4 billion and deposits of $346 billion; Discover ranked 33rd, with $143.4 billion in assets and $104 billion in deposits.

Both companies have benefited from the increase in credit card usage by Americans. According to the latest data from the New York Federal Reserve, the total credit card-related debt of Americans reached $1.13 trillion in the 4th quarter of 2023, and the total balance of household debt increased by $212 billion, an increase of 1.2% quarter-on-quarter.

After struggling with inflation for more than two years, more and more middle and low-income Americans have exhausted their savings, increased their credit card balances, and started to bear personal loans.

As credit card debt balances increase, consumers have to pay higher interest rates. In the meantime, both banks have also had to increase their reserves to cope with the possibility of rising default rates among borrowers.

The additional reserves have put pressure on both banks' profits. Last year, Capital One's net profit available to common shareholders fell 35% compared to 2022, while its loan loss provisions soared 78% to $10.4 billion. Meanwhile, Discover's full-year profit fell 33.6% from 2022, and its credit loss provisions more than doubled, reaching $6.02 billion.

The merger of the two, in addition to increasing bank deposits and loan accounts, will also allow Capital One to access Discover's payment processing network. Although the size of Discover's network is smaller than Visa and Mastercard, it would allow Capital One to earn revenue from fees collected from every merchant transaction run on its network.

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