Capital One to Acquire Discover

Capital One Financial Corporation has announced its intention to acquire Discover Financial Services in an all-stock transaction valued at approximately $35.3 billion. This strategic acquisition is set to create a payments gian with an expansive reach of 70 million merchant acceptance points across more than 200 countries and territories, marking a significant step towards building a globally competitive payments platform.

For small business owners, this development is particularly noteworthy. The merger positions the combined entity to rival the largest payments companies, promising enhanced value and expanded opportunities for over 100 million customers, including a substantial number of small businesses. Capital One’s acquisition of Discover is not just about scaling operations but is a strategic move to leverage both companies’ technological advancements and data ecosystems to drive sales for merchants while offering attractive deals for consumers and small businesses alike.

The terms of the agreement dictate that Discover shareholders will receive 1.0192 Capital One shares for each Discover share they hold, translating to a 26.6% premium based on Discover’s closing price as of February 16, 2024. This exchange ratio means that, upon closure, Capital One shareholders will own approximately 60% of the combined company, with Discover shareholders owning the remaining 40%.

Richard Fairbank, founder, Chairman, and CEO of Capital One, highlighted the merger as a unique opportunity to unite two successful companies with complementary capabilities. Fairbank emphasized the potential to compete with top payment networks and deliver significant value across stakeholders as technology continues to revolutionize the payments and banking sectors.

Echoing this sentiment, Michael Rhodes, CEO and President of Discover, acknowledged the merger as a testament to Discover’s robust business model and the dedication of its employees. Rhodes expressed enthusiasm for the enhanced growth potential and shareholder value the combined entity is poised to unlock.

Strategically, the merger aims to build a powerful, globally competitive payments network, combining Discover’s extensive merchant acceptance points with Capital One’s technological and customer-centric approach. This union is expected to drive more sales for merchants and offer greater deals for consumers and small businesses, thanks to the expanded scale and investment into the Discover network.

The deal also promises compelling financial results, with expectations of generating $2.7 billion in pre-tax synergies and being more than 15% accretive to adjusted non-GAAP EPS in 2027. Moreover, the transaction forecasts a return on invested capital (ROIC) of 16% in 2027, with an internal rate of return (IRR) exceeding 20%.

Both companies have committed to maintaining their strong community presence, with Capital One continuing its significant community investment efforts, including its $200 million Impact Initiative. The merger is anticipated to further strengthen Capital One’s balance sheet, boasting a CET1 ratio of approximately 14% at closing, with 84% of the company’s deposits insured as of year-end 2023.

Pending regulatory approvals and shareholder consent, the transaction is expected to close in late 2024 or early 2025. Upon completion, the board of directors for the merged entity will include three members from Discover, ensuring a smooth integration and strategic continuity.

For small business owners, the merger between Capital One and Discover signals a future of enhanced payment solutions, greater access to innovative financial products, and a stronger, more competitive marketplace. As the combined company leverages its technological prowess and vast customer base, the small business community stands to gain from improved sales opportunities, more favorable transaction terms, and access to a broader range of financial services designed to meet their unique needs in an increasingly digital economy.

Capital One acquires Discover, creating a payments giant to boost value for small businesses and consumers globally.

Image: Discover, Capital One

This article, “Capital One to Acquire Discover” was first published on Small Business Trends