257.7 billion. The largest merger and acquisition this year has been refreshed again.

Author: Wang Manhua

Source: China Venture Capital

The American credit card giant Capital One has once again refreshed the record for the largest annual merger and acquisition transaction.

Recently, the Federal Reserve and the Office of the Comptroller of the Currency have officially approved Capital One's (hereinafter referred to as Capital One) application to acquire Discover Financial Services. The transaction is valued at up to $35.3 billion (approximately RMB 257.7 billion), breaking the previous record of $32 billion set by Google when it acquired Wiz.

This huge transaction started in February 2024. According to the acquisition terms at that time, Capital One will acquire Discover Financial Services through an all - stock transaction. After the completion of the transaction, the existing shareholders of Capital One will own 60% of the shares of the merged company, and the shareholders of Discover Financial Services will own the remaining 40%.

Capital One and Discover Financial Services are the fourth - and sixth - largest credit card issuers in the United States respectively. After the completion of this acquisition, in terms of loan volume, Capital One is expected to surpass its competitors JPMorgan Chase and Citigroup to become the largest credit card company in the United States.

Interestingly, in 2023, the stock god Warren Buffett bought Capital One stocks for $954 million, becoming the seventh - largest shareholder. The average purchase price at that time was about $96.15 per share. Now, the stock price of Capital One has reached around $170. If the acquisition of Discover Financial is finally completed, it is imaginable that Buffett's investment resume will add another glorious chapter.

The Largest Credit Card Company in the United States May Change Hands

The merger between Capital One and Discover Financial can definitely be regarded as a combination of the strong.

Capital One's predecessor was the credit card department of Signet Bank, a local American bank. It was spun off as an independent credit card company in 1994 and was officially renamed "Capital One" in 1995.

In terms of the establishment time, Capital One's entry into the market was not early. In the early 1990s, the American credit card market had been divided up by more than a dozen financial giants such as American Express and Citigroup. However, the founder Richard Fairbank noticed a key pain point in the industry: the credit card services of traditional banks were almost "one - size - fits - all", that is, high - quality customers subsidized high - risk users, and this extensive business model seriously underestimated the value of data.

Based on this, Capital One decided to analyze customer risks through big data and provide personalized credit services. For example, for users with different credit ratings, data analysis models will be used for risk pricing, and corresponding credit card products will be provided.

It can be said that Capital One is also a pioneer in the field of fintech.

In addition to making good use of big data, Capital One also innovatively launched the "credit card balance transfer" business. At that time, American credit card users had to pay an annual interest rate of nearly 18%. Capital One's approach was to let users transfer their balances to their credit cards and provide an interest - free or low - interest period ranging from 3 months to 18 months, which was equivalent to providing users with an interest - free bridge loan to pay off their debts.

The above innovative concepts have won Capital One wide favor in the market. Nowadays, Capital One is already the fourth - largest credit card issuer in the United States, with total assets of $490.1 billion and a market value of $65.18 billion.

Compared with Capital One, Discover Financial was established earlier.

In the 1980s, Sears, the largest retailer in the United States, decided to launch its own credit card to enrich its customer service system, so it established Discover Financial. Later, the company was spun off from Sears, merged with Morgan Stanley, and finally was spun off and independently listed in 2006.

Up to now, Discover Financial has also become the sixth - largest credit card issuer in the United States, with total assets of $143.4 billion and a market value of $43.36 billion.

Now that the two credit card giants have officially announced their merger, it means that the total assets of the new company will exceed $600 billion. This figure will also bring about a huge change to the pattern of the American credit card market - In terms of loan volume, the merged company is expected to surpass its competitors JPMorgan Chase and Citigroup to become the largest credit card company in the United States.

Both a "Safety Net" and a Way to Make Up for Shortcomings

It is not surprising that both Capital One and Discover Financial agreed to this transaction.

First, from the external environment, as mentioned above, this transaction started in February 2024, and at this time, the American credit card market was at the forefront of the storm.

In the past few years, affected by the pandemic, inflation and other reasons, the financial situation of low - and middle - income families in the United States has faced great pressure. According to data from the consumer financial services company Bankrate, in 2023, Americans' credit card debt will exceed $1 trillion, reaching a record high. The agency predicts that in 2024, nearly one - third of Americans will have credit card debt exceeding their savings.

Against this background, many American banks such as Capital One and Discover Financial are also facing the embarrassing situation of continuously soaring bad debts. Data shows that in 2023, the net profit available to common shareholders of Capital One decreased by 35% compared with 2022, and the loan loss reserve soared by 78% to $10.4 billion. The annual profit of Discover Financial decreased by 33.6% compared with 2022, and the credit loss reserve more than doubled to $6.02 billion.

The most direct benefit after the merger of the two companies is that it can relieve the pressure of having to increase the deposit reserve due to the expansion of credit card debt balances.

Secondly, from a business perspective, the merger of Capital One and Discover Financial will also promote the complementary advantages of both sides.

Discover Financial's strength lies in its powerful payment network. So far, it has more than 70 million outlets in more than 200 countries and regions around the world, becoming the fourth - largest payment network company in the United States after Visa, MasterCard and American Express.

This is exactly Capital One's shortcoming. For a long time, Capital One's payment network has relied on external companies to operate. Data shows that in 2023, out of the total transaction volume of $606 billion of Capital One's credit card users, $255 billion came from its Visa cards and $351 billion came from MasterCard.

After the acquisition is completed, Capital One will obtain Discover Financial's payment network to reduce its dependence on external institutions, thereby enhancing its autonomy and flexibility in the payment field. For Discover Financial, joining hands with Capital One can not only increase its number of users and market scale by an order of magnitude but also enhance its competitiveness in the market.

Generally speaking, whether from the perspective of the market environment or industrial synergy, the merger of Capital One and Discover Financial has become the "optimal choice".

However, there are also critical voices in the market regarding this merger. For example, the non - profit organization Better Markets believes that this transaction will reduce market competition, raise service fees, and shrink the living space of regional banks.

In response, the regulatory authorities seem quite optimistic, saying that the existing regulatory measures are sufficient to balance these potential problems. "This merger is not only a capital integration but also a stress test for the modern financial regulatory system."

Capital One: A History of Large - Scale Mergers and Acquisitions

Putting aside this transaction and looking back at Capital One's development history, we can find that this company is very good at using capital means to break through business ceilings.

As early as 1998, Capital One officially entered the auto - loan field by acquiring the auto - loan institution Summit. Summit provided Capital One with a test platform in the auto - finance field, which was in line with its data - driven strategy.

This acquisition not only helped Capital One expand its business scope but also brought significant benefits. At the end of 1999, Capital One's installment - loan balance increased by 45% year - on - year.

After that, Capital One continued to expand its influence in the auto - loan field through acquisitions. In 2001, the company acquired PeopleFirst, the largest online auto - loan provider in San Diego, California; in 2004, it acquired Onyx Acceptance Corporation and became the second - largest independent auto - loan institution in the United States at that time.

Also in 2004, Capital One officially entered the housing - mortgage field by acquiring the online housing - mortgage provider eSmartloan and the British housing - mortgage company Hfs Group.

In 2005, starting from this year, Capital One successfully expanded its retail - banking business through a series of strategic acquisitions, made up for its business shortcomings, and gradually transformed into a comprehensive commercial bank.

In 2005, Capital One first acquired Hibernia National Bank, the leading bank in Louisiana, which had a 21% deposit - market share in the local market. Immediately afterwards, in 2006, Capital One further optimized its asset - liability structure by acquiring North Fork Bancorp. In December of the same year, it acquired all the issued common shares of North Fork Bancorp. NFB is a bank - holding company with more than 350 branches in the New York City area and is a national mortgage company.

Thanks to this series of mergers and acquisitions, at the end of 2006, Capital One's deposit balance increased to more than three times that at the end of 2004. Making up for the shortcomings in the liability side also enabled it to survive the 2008 financial crisis safely.

From 2009 to 2022, Capital One successively acquired Chevy Chase Bank, the direct - banking business of the Dutch ING Group in the United States, the U.S. credit - card business of HSBC, the healthcare - finance department of General Electric in the United States, and the Indian mobile and web - development company Monsoon, etc.

Through decades of acquisitions, Capital One has long been among the sixth - largest retail banks in the United States. Now, this $35.3 - billion blockbuster transaction is destined to further change its position in the U.S. and even the global banking market.

However, for Capital One, the completion of this transaction is only the starting point of a new competition.

This article is from the WeChat official account "China Venture Capital". Author: Wang Manhua. Republished by 36Kr with permission.