Capital One Financial Corporation and Discover Financial Services today announced that they have entered into a definitive agreement under which Capital One will acquire Discover in an all-stock transaction valued at $35.3 billion. Discover employs roughly 3,500 people in Arizona, primarily at a North Phoenix customer service and support center.

The transaction brings together two companies with long-standing track records of delivering attractive and resilient financial results, award-winning customer experiences, breakthrough innovation, and financial inclusion.

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Under the terms of the agreement, Discover shareholders will receive 1.0192 Capital One shares for each Discover share, representing a premium of 26.6% based on Discover’s closing price of $110.49 on February 16, 2024. At close, Capital One shareholders will own approximately 60% and Discover shareholders will own approximately 40% of the combined company.

“From Capital One’s founding days, we set out to build a payments and banking company powered by modern technology. Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies,” said Richard Fairbank, founder, Chairman and Chief Executive Officer of Capital One. “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.”

“The transaction with Capital One brings together two strong brands with enhanced ability to accelerate growth and maximizes value for our shareholders, enabling them to participate in the tremendous upside of the combined company,” said Michael Rhodes, CEO and President of Discover. “This agreement underscores the strength of our business and is a testament to the hard work of Discover employees. We look forward to a bright future as part of the Capital One family and to providing expanded opportunities for our loyal customers.”

Strategic Rationale

Building a Globally Competitive Payments Network

  • Discover has built a rare and valuable global payments network with 70 million merchant acceptance points in more than 200 countries and territories. Even so, it is the smallest of the four US-based global payments networks. This acquisition adds scale and investment, enabling the Discover network to be more competitive with the largest payments networks and payments companies.
      
  • This is a key foundation in Capital One’s quest to build a global payments company. It will accelerate the company’s long-standing journey to work directly with merchants to leverage its customer base, technology, and data ecosystem to drive more sales for the merchant and great deals for consumers and small businesses.

Combining Complementary Card Businesses

  • Capital One and Discover are proven credit card franchises with complementary strategies and a shared focus on the customer. Both companies have developed compelling flagship products, award-winning customer experiences, and powerful brands. They have also both delivered attractive and resilient growth and returns through economic cycles.
      
  • The combined credit card business will be in an even stronger position to deliver industry-leading products and experiences that span the credit card marketplace across consumers, small businesses, and merchants.

Scaling our “Digital First” National Bank

  • Capital One Bank is propelled by an iconic customer experience and a strikingly simple value proposition. It is the only major bank with no fees, no minimums, and no overdraft fees. According to J.D. Power, customers have rated Capital One Bank #1 in U.S. National Banking Overall Customer Satisfaction for four consecutive years.
      
  • Customers can enjoy an entirely digital, full-service banking experience, or visit one of 259 branches, more than 80,000 fee-free ATMs, more than 16,000 cash deposit locations, and 55 iconic Capital One Cafes in 21 of the country’s 25 largest metro areas.
      
  • Adding Discover’s fast-growing national direct savings bank will increase the combined company’s scale to compete with the nation’s largest banks, and the Discover Global Network brings a significant opportunity to accelerate national banking growth.

Leveraging our Technology Transformation

  • Capital One will scale and leverage the benefits of an eleven-year technology transformation across all of Discover’s businesses and the network.
      
  • Capital One’s technology transformation is powering innovation, much faster speed to market, breakthrough products and experiences, real-time customized marketing, faster growth, better underwriting, enhanced efficiency, and better risk management and compliance.

Compelling Financial Results

Creating Significant Synergies

  • The transaction is expected to generate expense synergies of $1.5 billion in 2027 (26% of Discover operating expenses, plus 10% of Discover marketing expenses), driven by common business functions partially offset by targeted investments in the Discover network.
      
  • The acquisition is expected to generate network synergies of $1.2 billion in 2027, driven by adding Capital One debit purchase volume and selected credit card purchase volume to the Discover network.

Delivering Attractive Accretion and Returns

  • The deal is expected to be more than 15% accretive to adjusted non-GAAP EPS in 2027.
      
  • The transaction is expected to deliver return on invested capital of 16% in 2027, with an internal rate of return in excess of 20%.

Strengthening a Strong Balance Sheet

  • The transaction will further strengthen Capital One’s balance sheet. On a pro forma basis, the combined company would have a CET1 ratio of approximately 14% at closing, and 84% of company deposits would be insured as of year-end 2023.

Making a Positive Difference in our Communities

  • Both Capital One and Discover have proud histories of commitments to their communities. Capital One has a long-standing track record of “Outstanding” Community Reinvestment Act performance since 2001, and has ranked first or second in community development lending among all banks since 2015, with over $59 billion in CRA-qualified loans over that period. Capital One is in the fourth year of its 5-year, $200 million Impact Initiative, supporting non-profit organizations seeking innovative solutions to address Affordable Housing, Workforce Development, Small Business Creation, Financial Well-being and Digital Access.
      
  • Capital One appreciates the importance of Chicagoland and remains committed to maintaining a strong presence in that market, as well as maintaining service excellence across the U.S.

Building One of America’s Great Places to Work

  • Both Capital One and Discover have been recognized as great places to work on the Fortune 100 Best Companies to Work For® list. This year was Capital One’s 12th consecutive year on the prestigious list.

Timing and Approvals

The transaction is expected to close in late 2024 or early 2025, subject to satisfaction of customary closing conditions, including regulatory approvals and approval by the shareholders of each company.

Governance

Upon closing, three Discover Board members, to be named at a later date, will join the Capital One Board of Directors.

Advisors

Centerview Partners LLC served as financial advisor and Wachtell, Lipton, Rosen & Katz served as legal advisor to Capital One. PJT Partners and Morgan Stanley & Co. LLC served as financial advisor and Sullivan & Cromwell LLP served as legal advisor to Discover.