US lender Capital One to acquire Discover Financial for $35 billion

US consumer bank Capital One has agreed to buy Discover Financial Services in a $35 billion all-stock deal to create the largest US credit card company by loan volume, giving the combined entity a stronger foothold to compete with Wall Street’s biggest lenders.

McLean, Virginia-based Capital One will pay 1.0192 of its own shares for each Discover share, a 26.6 per cent premium to the closing price on February 16.

The transaction is expected to be completed in late 2024 or early 2025, pending regulatory and shareholder approvals of both companies.

The purchase of Discover ranks as the biggest merger globally this year, surpassing Synopsys's roughly $34 billion acquisition of software developer Ansys announced in January.

The deal brings together two storied consumer-finance brands, a combination that will surpass long-time rivals JP Morgan Chase and Citigroup by US credit-card loan volume, according to data compiled by Bloomberg Intelligence.

It’s a “singular opportunity” to bring together two companies that can compete with the largest payment networks, said Capital One chief executive Richard Fairbank.

Capital One holders will own about 60 per cent of the combined company and Discover holders the remainder. The acquisition will generate pre-tax synergies of $2.7 billion.

“The main rationale is the fixed costs of technology that result in bigger being better,” said Jay Ritter, finance professor at the University of Florida.

“This fact has been reshaping many industries for many years, and I see no reason to think that the trend towards fewer, but larger, firms will end.”

Capital One is known for its commercials featuring celebrities such as Jennifer Garner and Samuel L Jackson asking, “What’s in your wallet?”

The company, led by Mr Fairbank, 73, has historically catered to subprime consumers who carry a balance on their cards each month.

Mr Fairbank said on an earnings call in January that delinquencies had stabilised after reporting net charge-offs that were higher than analysts expected as borrowers fell behind on their credit-card and car loans.

In recent years, Capital One has been trying to attract more premium customers that tend to be heavy-spending and more loyal.

It agreed to buy digital concierge service Velocity Black last year, pushing deeper into luxury markets dominated by companies such as American Express and JP Morgan.

Discover has long focused on prime customers with better credit ratings, although it has historically shied away from the flashy sign-on bonuses and lavish perks used by many of its rivals.

Discover said in January that its fourth-quarter profit dropped 62 per cent as it continued to grapple with the fallout. The company halted buy-backs last year and has been seeking a buyer for its student-loan business.

In December, Discover appointed Toronto-Dominion Bank’s Michael Rhodes as its new chief executive, lining him up to take over by early March.

“Credit card companies have large fixed costs for information technology, partly for algorithms aimed at fraud prevention, so bigger is better,” said Mr Ritter.