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Capital One's bold move: Acquisition bid for Discover shakes financial landscape

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2024-02-20

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Seemingly out of the blue, a major US financial merger deal emerges, untouched by crisis or regulatory bailout.

Capital One, one of America’s largest banks and a prominent credit card issuer, aims to acquire another credit card giant, Discover, for $35.3 billion (over $53 billion AUD).

The bid, an all-share offer, reveals Capital One's reluctance to risk cash amidst current high borrowing rates, signaling its outlook on US interest rates.

Under the terms, Discover shareholders will receive slightly over one share of Capital One for each Discover share—a premium of nearly 27% from Discover's recent closing share price of $110.49.

Should the deal materialize, current Capital One shareholders will hold a 60% stake in the merged entity, with Discover shareholders retaining the remaining 40%.

At the close of Friday's trading, Capital One was valued at $52 billion while Discover stood at just under $27 billion.

Capital One boasts $479 billion in assets and issues cards on networks like Visa, Mastercard, and Discover, without disclosing the number of cards in circulation.

Discover boasts 305 million cardholders atop a 100-million-strong customer base, providing a solid rationale for the acquisition.

However, amid the absence of official commentary, speculation arises: was there a subtle regulatory push nudging Discover towards acquisition consideration?

Recent troubles cast a shadow: a regulatory review over misclassified credit card accounts, CEO departure, compliance issues, and plans to offload the student loan business.

Both companies witnessed lackluster financial reports for the December quarter, with a substantial decline in profits attributed to increased provisions for loan losses amid rising interest rates, heightening the risk of consumer defaults.

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