US lender Capital One has agreed to buy rival Discover Financial for $35.3bn, in an all-stock tie-up that is set to unite two of America’s largest credit card companies.
Capital One’s acquisition of Discover values its smaller rival’s stock 27 per cent above Friday’s closing price. Under the terms of the deal, Discover shareholders would receive 1.0192 Capital One shares for each of theirs.
“Through this combination, we’re creating a company that is exceptionally well-positioned to create significant value for consumers, small businesses, merchants and shareholders as technology continues to transform the payments and banking marketplace,” said Richard Fairbank, founder and chief executive of Capital One.
The merger between Virginia-based Capital One and Illinois-based Discover would shake up the US credit card landscape and mark one of the industry’s biggest deals since the 2008 financial crisis.
Capital One and Discover are two of the biggest credit card lenders, behind JPMorgan Chase and Citigroup. Discover also offers a payment network, making it a competitor with the likes of Visa and Mastercard.
The last big merger between two banks occurred almost five years ago, when regional lender BB&T bought SunTrust for about $28bn in a $66bn deal, forming Truist.
Consolidation in the highly fragmented US banking sector has long been expected but several large players have struggled to successfully integrate and capture the synergies hoped for when two rivals combine.
Capital One and Discover said on Monday that the transaction is expected to generate expense synergies of $1.5bn in 2027 and deliver a return on invested capital of 16 per cent in 2027.
The potential deal comes at a time when US regulators are planning to reform bank merger rules in an effort to boost transparency and increase scrutiny of deals.
A Capital One acquisition of Discover is likely to be examined carefully by US antitrust regulators given the large size of the two companies’ credit card businesses.
The companies said they expected the deal to close by late 2024 or early 2025.
After a weak year for dealmaking in 2023 partly due to tougher antitrust enforcement and high interest rates, recent months have seen a resurgence in megadeals as chief executives become more confident that they can complete transactions.
Over the past few months ExxonMobil agreed to acquire shale group Pioneer Natural Resources for $60bn, Chevron reached a deal to buy Hess for $53bn and chip design toolmaker Synopsys announced the takeover of engineering software maker Ansys for $35bn.
Capital One, known in America for its “What’s in your wallet?” advertising slogan delivered by celebrities such as Samuel L Jackson and Jennifer Garner, is the 12th-biggest US bank by assets.
It was one of several lenders that came under pressure following the collapse of Silicon Valley Bank in March last year.
Capital One’s stock has since recovered, boosted in part by Warren Buffett’s Berkshire Hathaway taking an almost $1bn stake.
Discover announced in December that it had appointed former TD Bank executive Michael Rhodes as its chief executive, months after the sudden departure of the company’s former boss Roger Hochschild.
Credit card lenders saw very low delinquency rates following government stimulus programmes during the Covid-19 pandemic but have warned that consumers are gradually spending down much of their excess savings.