Capital One Financial Corporation (COF) has officially received the final regulatory green light for its acquisition of Discover Financial Services (DFS), a pivotal move expected to reshape the landscape of U.S. banking. The approval from the Federal Reserve System and the Office of the Comptroller of the Currency (OCC) marks a significant milestone in the $35.3 billion deal, which is set to close on May 18, 2025, pending customary closing conditions.
This merger, announced in February 2024, is poised to create the eighth-largest bank in the United States, with combined assets of approximately $637.8 billion, representing 2.2% of the nation's insured deposits. Capital One will emerge as the largest credit card issuer by balances, significantly enhancing its competitive stance against established players like Visa and Mastercard.
Shareholder support for the acquisition has been overwhelming, with over 99% voting in favor of the deal, reflecting strong investor confidence in the strategic advantages it presents. Capital One shareholders will own 60% of the newly formed entity, while Discover shareholders will hold the remaining 40%. Under the terms of the acquisition, Discover shareholders will receive 1.0192 Capital One shares for each share they own.
Michael Shepherd, interim CEO and president of Discover, expressed optimism about the merger, stating, "The combination will increase competition in payment networks, offer a wider range of products to our customers, increase our resources devoted to innovation and security, and bring meaningful community benefits." This sentiment underscores the anticipated positive impact on the banking sector and consumers alike.
However, the approval comes with conditions. The OCC's endorsement is contingent upon Capital One addressing the "root causes" of any outstanding enforcement actions against Discover. Additionally, the Federal Reserve imposed a consent order on Discover, alongside a $100 million fine for overcharging fees from 2007 to 2023. The Federal Deposit Insurance Corporation (FDIC) has also ordered Discover to pay a separate $150 million civil fine for similar violations.
Despite these regulatory hurdles, both Capital One and Discover have assured customers that there will be no immediate changes to their accounts following the merger's closure. Customers will continue to receive information through established communication channels until any future changes are warranted.
The merger is seen as a litmus test for how quickly the current administration will approve mergers in the financial sector, which many executives believe is ripe for consolidation. With the Department of Justice having previously signed off on the acquisition, the path forward appears clear.
As the financial industry braces for this significant shift, analysts have noted that the merger will not only enhance Capital One's market share but also expand its credit card offerings and deposit base. Both companies are among the largest credit card issuers in the U.S., and the combination is expected to further solidify their positions in the market.
While the stock of Capital One has seen a decline of 9% this year, Discover Financial's stock has slumped 8%. Nevertheless, the consensus among Wall Street analysts remains optimistic, with a Strong Buy rating based on 11 Buy and three Hold recommendations. The average price target for COF is set at $205.71, suggesting a potential upside of 26.38% from current levels.
In summary, the final regulatory approvals for Capital One's acquisition of Discover Financial Services represent a transformative moment in the U.S. banking industry. With a robust Community Benefits Plan worth $265 billion aimed at enhancing economic opportunity and financial well-being across the country, the merger promises not only to reshape the competitive landscape but also to deliver significant benefits to consumers.
