Shares of Discover Financial surged 13% in pre-market trading on Tuesday following the announcement of a $35.3 billion acquisition by U.S. lender Capital One, which has stirred the payments sector, traditionally dominated by leading processors. The all-stock transaction positions Capital One to potentially lessen its dependence on Visa and Mastercard amid longstanding criticisms over their payment processing fees and accusations of market control.
Discover Financial’s Stock Surges on $35Bn Capital One Merger Deal
Capital One’s strategic acquisition of Discover’s payments processing and settlement services network is seen as a move to diversify its payment processing partners, aiming for a $1.2 billion boost by 2027. This development has been viewed unfavourably for Visa and Mastercard, with their shares dropping 1.8% and over 2%, respectively, as analysts anticipate a competitive shake-up in the industry.
Despite the potential for change, the transition to Discover’s network might extend, especially considering the recent renewal of partnership agreements between Capital One and both Visa and Mastercard. Nonetheless, this deal marks a historic moment in the credit card industry, surpassing Bank of America’s $35.19 billion acquisition of MBNA Corp in 2005 as the largest transaction of its kind, based on Dealogic data.
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Analysts predict that the merger between two of the largest credit card issuers in the U.S. will undergo rigorous antitrust examination due to its significant market impact. The consolidation is expected to establish a dominant player in a market where the top 10 issuers command about 90% share.
Despite potential regulatory challenges, Capital One anticipates the merger’s operational cost savings will justify navigating through complex regulatory landscapes to achieve substantial returns. With Discover’s shares trading at $124.35 against Capital One’s offer of $138.24, the merger could elevate Discover’s market value by over $3 billion, while Capital One’s shares have seen a 6% decline.
