Capital One to acquire Discover in $35 billion deal

Capital One (COF) is set to acquire Discover Financial Services (DFS) in a deal valued at approximately $35.3 billion. Yahoo Finance Live breaks down the details of this acquisition and Capital One's aim to standout among credit card competitors, noting Warren Buffett's stake in the bank.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

SEANA SMITH: Taking a look at two trending tickers on Yahoo Finance. Shares of Discover Financial jumping this morning, looking at gains of just about 12%. This comes after Capital One announced that it is going to buy the credit card lender in a deal valued at $35 billion.

Now, this deal pulls together two of the top six credit card companies by purchase volume. So putting this in perspective for everyone, the merger could have big implications for competitors, like Visa, Mastercard, and American Express. And this is one of the angles that are executive editor Brian Sozzi is digging into on our home page here this morning in our blog, talking about what this would mean here for the broader financial industry, for the broader credit card industry.

But again, this creates the largest credit card company by loan volume. And we know Capital One being backed by Warren Buffett here, this really enables-- ultimately, you can make the argument, better compete with some of those Wall Street behemoths that are out there. And we're seeing that reflect at least some of that optimism obviously in Discover shares today. Although Capital One under a bit of pressure, not exactly a huge surprise.

BRAD SMITH: Yeah, some of the financials that they're talking about on this deal, $2.7 billion in pre-tax synergies. Also, return on invested capital of about 16% in 2027 is what they're expecting, an internal rate of return of about 20% here. There was a conference call this morning. We'll see what more continues to come out of the discussions as these companies are looking to then solidify this moving forward as they hope to get it past the regulatory sniff checks.

But as of right now, as you were mentioning, bringing together two companies, huge track records of some of the, as they would say, resilient financial results. It's a larger question for me, I think, of, and even as we were talking about it during our meeting this morning, what is the core customer that they're going after. This is not the same type of customer that Discover has on their balance sheets that American Express does.

And so as you think about that, it is a larger question of what some of the net loss or net interest expenses that they have to think about with that customer are, and then ultimately here, the shareholders at the end of the day, too. They're saying that Capital One shareholders are going to have about 60% and Discover shareholders about 40% of this combined company, once everything is fully consummated in the deal, as well, here.

SEANA SMITH: Yeah, certainly. I think the vibe on the street here early this morning is it makes a heck of a lot of sense here in the longer term, especially when you're going up against some of those larger players, RBC, one of the analysts here on the street echoing that sentiment this morning, saying that they believe the combination of Capital One and Discover should be strategically compelling from a competitive perspective. But once again, you're seeing some of that pressure on shares of Capital One this morning, a lot of that probably tied to what you're looking at on your screen there in the lower third, the $35 billion price tag that they are paying here for Discover. So again, we will see how it trades for today, but the early vibe on the street is strong here for this merger.