According to a Monday report, Capital One plans to acquire Discover Financial, potentially forming the most prominent U.S. credit card firm in terms of loan volume.
Capital One Merger with Discover
The mega-deal, expected to be announced on Tuesday, could be one of the largest of the year, as The Wall Street Journal reported, citing sources familiar with the matter. Capital One was discussing with advisors to assess the chance of a merger with Discover, as Bloomberg News had also reported earlier.
Discover Financial's Deposit-Gathering Capabilities
According to an internal review, Discover had a tough year due to compliance issues leading to its CEO's resignation. In Q4, the credit card company reported a 62% profit drop and currently carries a market value of approximately twenty-seven billion, six hundred thirty million dollars, with shares down nearly 2% for the year. Backed by Warren Buffett, Capital One has seen its shares rise by almost 5% in 2024, reaching a market capitalization of fifty-two billion, two hundred million dollars. Financial markets were shut in the U.S. on Monday for Presidents' Day.
The acquisition would help Capital One increase its credit card customers and expand its consumer deposits since Discover has an online banking division.
According to The Journal's report, Capital One plans to keep the Discover brand and transition some cards it issues to the Discover network. Currently, Capital One primarily utilizes Visa and Mastercard for its issued cards.
David Schiff, who leads consumer retail and banking at West Monroe, stated that Discover has excelled in attracting deposits and has extensive access to institutions for running the debit card network and offering services, which provides significant deposit-gathering capabilities, particularly crucial in the current market environment.
Schiff mentioned that there are few comparable acquisitions in the financial industry, suggesting that the Capital One-Discover deal will probably have significant effects on merger activity in the sector, highlighting, "It is a good example of the risk we are seeing in the market, where the competing interests from regulators for increased control and rigor balance against the competitive demands that are being made quite clearly."
Growing Challenges Discover is Facing
The deal happens as Discover faces growing challenges, such as regulatory scrutiny and new leadership. Michael Rhodes, the current CEO, was appointed in December 2023.
Discover has faced challenges in recent months. Last month, the company reported earnings below expectations and cautioned about difficult conditions for consumers, leading to higher provisions for credit losses. Discover shares dropped significantly after the earnings report but have recovered most of those losses in the past month. In August, Discover revealed that Roger Hochschild would resign as CEO following the disclosure of misclassified credit card accounts the previous month. Additionally, the company was under investigation by the Federal Deposit Insurance Corp., which was settled in October through a consent agreement requiring Discover to enhance compliance and risk management.
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