Capital One (NYSE:COF) stock is in focus today on news that the company is planning to buy Discover Financial Services (NYSE:DFS) for $35.3 billion in stock. The deal is sending COF stock down, along with Master Card (NYSE:MA) and Visa (NYSE:V). Capital One is the third-largest issuer of credit cards.
Capital One opened today at $136.01 per share and currently has a market capitalization of about $52 billion. Meanwhile, Discover Financial opened at $110.23 per share and currently sports a $30 billion market cap, with DFS stock up 12% as of this writing.
If the merger goes through, COF stock shareholders will have 60% of the new company. Discover shareholders will own 40%.
DFS Stock: Will the Deal Get Done?
Capital One values Discover at around $140 per share based on shares outstanding. The fact that DFS stock hasn’t moved much closer to that price shows there’s uncertainty over this deal getting done. If the deal does get done, Capital One would become the largest issuer of consumer credit cards.
The Consumer Financial Protection Bureau (CFPB) issued a report last week offering trustbusters some ammunition, if they choose to challenge the deal. Specifically, it stated that lack of competition leads to higher rates in the credit card market. In 2023, the Federal Trade Commission (FTC) also updated its merger guidelines.
Since then, smaller mergers than this one have been blocked, including one between JetBlue (NASDAQ:JBLU) and Spirit Airlines (NYSE:SAVE). However, Microsoft’s (NASDAQ:MSFT) acquisition of Activision Blizzard did go through and the government has been actively seeking mergers between weak banks.
So, this deal may be approved because Discover is a weaker credit card brand, smaller than the likes of American Express (NYSE:AXP), Master Card and Visa. Capital One plans to maintain the Discover brand.
There’s another motivation for approval in Discover’s operations. Last year, the Federal Deposit Insurance Corporation (FDIC) demanded that Discover improve its consumer compliance. Not long after, CEO Roger Hochschild resigned.
What Happens Next?
Capital One and Discover hope that the merger will close in late 2024 or early next year. They may be optimistic.
On the date of publication, Dana Blankenhorn had a LONG position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
