Capital One to Acquire Discover Financial Services for $35.3 Billion

Capital One, a US consumer lender backed by Warren Buffett, plans an all-stock transaction to acquire Discover Financial Services for $35.3 billion. The merger aims to create a payment network that can compete with the biggest payment networks and companies. The merger includes Visa, Mastercard, and American Express, among other well-established payment networks.

Shareholders will receive 1.0192 shares of Capital One in exchange for each share of Discover, a premium of 26.6%. After the merger is finalized, Discover shareholders will hold an average of 40% of the company, while Capital One owners will have 60% ownership in the combined company. Capital One is the fourth-largest player in the US credit card market by volume, with a valuation of $52.2 billion as of 2022.

The Democratic Party and the regulatory environment are exerting significant pressure on the transaction. Authorities are expected to approve it either in the latter half of 2024 or the early part of 2025. The administration’s commitment to increasing competition in various industries, including banking, anticipates a comprehensive evaluation of the acquisition. In 2021, the administration sent an executive order emphasizing the significance of transactions involving banks.

Jeremy Kress, a professor of corporate law at the University of Michigan and former specialist on merger supervision at the Federal Reserve Bank, anticipates significant opposition and greater regulatory scrutiny. Kress has previously served as the chairman of the merger supervision section of the Federal Reserve Bank’s merger supervision section.

Democratic Progressives’ Opposition to Bank Mergers

Democratic Progressives generally oppose the merger of banks, as it negatively affects customers and increases the risk to the system. The number of transactions intended to save bankrupt lenders has increased, leading to increased pressure on authorities to adopt a more stringent position on mergers. JPMorgan’s acquisition of First Republic Bank is an example of this type of transaction.

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Acquisition of Capital One and Discover

Discover is ranked as the 27th largest bank in the United States with assets exceeding $150 billion, while Capital One holds assets worth $476 billion, placing it ninth in the ranking. Capital One successfully managed properties worth $476 billion, placing it ninth. Analysts project that the combined firm will rank as the sixth-largest bank in the United States region once the merger finalizes.

Discover’s Role in the US Credit Card Market

Discover is often considered one of the most important credit card processors in the United States, despite their similarities in the global credit card market. The Consumer Financial Protection Bureau (CFPB) is concerned about the level of competition within the credit card industry in the United States and the challenges faced by regulatory authorities in complying with regulations.

Regulatory Challenges and Earnings Decline

The CFPB cited a report highlighting cheaper interest rates offered by small banks and credit unions in the first half of 2023.

In 2007, Discover announced a review of credit card accounts that had been erroneously classified. As part of a consent agreement with the Federal Deposit Insurance Corporation, the company committed to increasing customer compliance in October of that same year. However, both Capital One and Discover experienced a decline in earnings during the fourth quarter.

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Regulatory Limitations and Compliance Challenges

Regulatory limits, particularly supervisory difficulties, are often obstacles that prevent financial institutions from merging with one another. Regulators may be more open to agreements when complaints target the company and the purchasing corporation has a strong track record in regulatory compliance, as these complaints directly impact the investigated company.

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