Capital One-Discover Deal A Step Closer As DOJ Softens Stance

Capital One’s (NYSE: COF)  deal to acquire Discover Financial (NYSE:DFS) may be moving closer to approval. While the U.S. Department of Justice was initially scrutinizing the $35.3 billion acquisition of Discover over concerns about banking sector consolidation and competition in the subprime credit market, it has reportedly shifted its focus to how the deal could affect consumers with no credit history. The Capitol Forum, an investigative news organization, reported that the DOJ may not challenge the merger, believing it lacks a strong enough case to block it in court.

Image by Ahmad Ardity from Pixabay

Shareholders have approved the deal, although it still requires regulatory clearance from the Federal Reserve as well as the Office of the Comptroller of the Currency. Discover stock gained about 7% over the last two trading days, touching about $171 per share, just a bit below the $181 the stock is valued at per the deal terms. The narrowing spread indicates that investors are more positive about the deal coming to fruition.

So what are the benefits of the deal?

Both Capital One and Discover are banks that issue credit cards and together account for under 20% of consumer credit card balances. This would make them the largest U.S. credit card company by loan volume if the deal were to close. That said, the most attractive part of the deal would be Discover’s proprietary card network, which charges merchants a fee for processing credit card transactions. Capital One presently uses Visa and Mastercard, which dominate the card payment network market. As the acquisition closes, Capital One could switch some of its business to the Discover network.

To be sure, Discover’s merchant acceptance is lower compared to Visa and Mastercard. Discover is accepted at about 70 million merchant acceptance points compared with Visa’s roughly 130 million and Mastercard’s 100 million. It’s quite likely that a bulk of Capital One’s business will remain with Visa and Mastercard even post a deal. However, the deal could give Discover better leverage in negotiating prices with the two dominant network players. A deal could also give Capital One opportunities to expand and enhance Discover’s merchant network. For instance, Capital One’s strong capabilities in credit card fraud protection and detection could be deployed more widely across the Discover Network.

The deal allows Capital One to cross-sell a wide range of financial products, including checking and savings accounts and personal and automotive loans to Discover’s loyal base of cardholders. This could drive up revenues for the combined entity.

The increase in COF stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 49% in 2021, -34% in 2022, 44% in 2023, and 38% in 2024. The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period.

Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could COF face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

We value Capital One stock at about $194 per share, slightly ahead of the current market price of about $178 per share. See our analysis of Capital One Valuation for a closer look at what’s driving our price estimate for the company.

[1] Returns as of 4/2/2025
[2] Cumulative total returns since the end of 2016

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